Transaction, Being Revenue Neutral, Does Not Affect The Interest Of Revenue, Delhi High Court Directs Refund

The petitioner/assessee filed three writ petitions in which the court granted six weeks to the respondents/department to pass a fresh order. The court directed the department to bear in mind probable additions that may have to be made in the scrutiny assessment proceeding, based on a prima facie estimation along with the reasons. The court has further directed the department to be mindful of the quantum of additions and disallowances, if any, on the basis of estimations and their likely tax impact; and the financial wherewithal of the assessee and its ability to meet and service any demand for tax that may be raised against it.

After the judgement was rendered by the court, the department refunded Rs. 561.72 crores (including interest) to the petitioner-assessee in respect of Assessment Year 2017-2018.

For the Assessment Year 2018-2019, a fresh order was passed by the AO, in which the department withheld Rs. 349,41,45,020/-. The foundation of the order was the view of the AO that the assessee may have to bear tax liability in the range of Rs. 500 crores as and when an assessment order is framed for Assessment Year 2018-2019.

Counsel for the assessee contended that the order passed by the AO was erroneous and unsustainable in law on the ground that the estimation of tax liability was not founded on cogent reasons and did not take into account either the history of the assessee or its financial wherewithal.

On the other hand, standing counsel for the department contended that the order of the AO adverted to the reasons why the AO has concluded that there was a likelihood of the assessee having to bear tax liability in the range of Rs. 500 crores.

The Court noted that the AO's conclusion was founded on the view that he would possibly have to make adjustments under the three heads, namely: addition on account of arm's length price (ALP) adjustments; addition on account of disallowance of foreign exchange loss on account of "Marked to Market Losses"; and addition on account of unearned revenue, which will lead to a likelihood of the assessee being mulcted with a tax liability of nearly Rs. 500 crores.

The Court observed that insofar as the first head was concerned, i.e., addition on account of ALP Adjustment, in the assessee's case, it could not give rise to any liability as the assessee has executed an Advance Pricing Agreement (APA).

In respect of the second head, i.e., disallowance of foreign exchange losses on account of "mark to market losses", the court held that the AO has let the issue hang in the air as he has not gone on to indicate an estimated amount which he was likely to disallow in AY 2018-2019 on account of foreign exchange fluctuation loss, which includes mark to market losses, and, therefore, the additional tax burden it would result in imposing on the assessee under foreign exchange losses on account of "mark to market losses".

The Court, in respect of the third issue, i.e., addition on account of unearned revenue, laid emphasis and gave weight to the aspects such as consistent application of accounting policy and the concept of revenue neutrality.

"It is not as if the petitioner/assessee is not offering unearned revenue for tax; it is only on account of accounting policy followed consistently that unearned revenue is offered for tax in the year in which services are rendered and/or goods are sold. Thus, the transaction, in effect, being revenue neutral, does not affect the interest of revenue," the court said.

The court allowed the appeal and directed the department to release Rs. 349,41,45,020 crores to the assessee, i.e., the refund claimed for AY 2018-19.

Case Title: Ericsson India Private Limited Versus Assistant Commissioner Of Income Tax

Citation: 2022 LiveLaw (Del) 222

Counsel For Petitioner: Advocates Vishal Kalra and S.S. Tomar

Counsel For Respondent: Advocates Shlok Chandra and Ruchir Bhatia

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