2025 (7) TMI 439 - AT - Income Tax

Delay filling appeal before ITAT - delay of 984 days - Eligible reasons for delay - HELD THAT - Whether the appellant established that there was sufficient cause with appellant in not filing appeal in prescribed period? - HELD THAT - Condonation of delay should not be used as an anticipated benefit for the government departments and unless the department has reasonable and acceptable genuine reason for the delay with bona fide efforts. It is true that that when there is no any gross negligence or deliberate inaction or lack of bona fide liberal approach has to be adopted to advance substantial justice but the claim on account of impersonal machinery and inherited bureaucratic methodology of making several notes cannot be accepted and the law of limitation undoubtedly binds everybody including the Government. The government departments are under a special obligation to ensuring performance of their duties with diligence and commitment and condonation of delay is an exception which should not be used as an benefit for the government departments. We are not inclined to discuss on the merits of the case as not convinced that sufficient cause has been made out for condonation of such inordinate delay and it is established that the present appeal filed beyond prescribed limit and appellant/Respondent have failed to prove that they were reasonably diligent in prosecuting the matter and this vital test for condoning the delay is not satisfied in this case and on the basis of the foregoing facts situation the appeal of the Revenue liable to be dismissed as it is time barred. As we decide the instant appeal on time barring no need to adjudicate other grounds of appeal.

Summary

The core legal questions considered by the Appellate Tribunal (AT) in this appeal are as follows:

1. Whether the Dispute Resolution Panel-II (DRP) was legally justified in deleting the addition made under section 40(a)(i) amounting to Rs. 9,34,91,383/- by ignoring the applicability of the exception under section 9(1)(vii)(b) of the Income Tax Act, 1961 (the Act).

2. Whether the DRP was legally justified in excluding two comparables considered by the Transfer Pricing Officer (TPO), namely M/s E-Infochips Bangalore Limited and M/s Infinite Data Systems Pvt. Limited, which were functionally similar to the assessee company.

3. Whether the DRP was justified in requiring strict functional comparability, disregarding the OECD guidelines which permit relaxed comparability for the Transactional Net Margin Method (TNMM).

4. The appellant's right to add, alter, amend, or forgo any grounds of appeal during the hearing.

Issue-wise Detailed Analysis:

1. Legality of Deletion of Addition under Section 40(a)(i) and Applicability of Exception under Section 9(1)(vii)(b):

Relevant Legal Framework and Precedents: Section 40(a)(i) of the Act disallows certain expenses if tax is not deducted at source (TDS). Section 9(1)(vii)(b) provides exceptions relating to income deemed to accrue or arise in India in certain cases. The DRP's role under section 144C(5) is to consider objections to draft assessment orders, including additions under section 40(a)(i).

Court's Interpretation and Reasoning: The Revenue contended that the DRP erred in deleting the addition under section 40(a)(i) without considering that the case was not covered by the exception under section 9(1)(vii)(b). The Tribunal noted that this ground was raised but ultimately did not adjudicate on merits due to the appeal being time-barred.

Key Evidence and Findings: The DRP had examined the facts and allowed the deletion of the addition. However, the Revenue's appeal was filed after a delay of over 1000 days, and the Tribunal focused on the delay in filing rather than the substantive issue.

Application of Law to Facts: The Tribunal emphasized that limitation is a statutory bar and unless sufficient cause is shown for delay, the appeal cannot be entertained. Since the Revenue failed to establish sufficient cause for the delay, the Tribunal declined to consider the substantive merits of this issue.

Treatment of Competing Arguments: The Revenue sought condonation of delay citing immense workload, departmental restructuring, and inadvertent oversight. The Tribunal critically examined these reasons and found them insufficient and indicative of negligence rather than bona fide cause.

Conclusions: The appeal on this ground was dismissed as time-barred, and no substantive decision was rendered on the legality of deletion under section 40(a)(i).

2. Exclusion of Comparables by DRP - M/s E-Infochips Bangalore Limited and M/s Infinite Data Systems Pvt. Limited:

Relevant Legal Framework and Precedents: Transfer pricing provisions require determination of arm's length price considering comparables. The OECD Transfer Pricing Guidelines provide principles for comparability analysis, including functional comparability and the use of relaxed comparability under TNMM.

Court's Interpretation and Reasoning: The DRP analyzed the annual reports and public domain information of the two comparables. It found that M/s E-Infochips was engaged in high-end technology-driven services and product development, which were not the taxpayer's forte. Similarly, M/s Infinite Data Systems was found to be functionally dissimilar, with activities in technical consulting, infrastructure management, and software design, differing from the taxpayer's domain.

Key Evidence and Findings: The DRP relied on detailed company profiles, annual reports, and website information to assess functional activities. For E-Infochips, the presence of board design services and complex product development distinguished it from the taxpayer. For Infinite Data Systems, the lack of a dedicated website and amalgamation with other entities led to uncertainty about its activities, and the taxpayer's service profile differed significantly.

Application of Law to Facts: The DRP applied the principle of functional comparability and excluded these comparables from the transfer pricing analysis. It directed the TPO to exclude these comparables in the final assessment.

Treatment of Competing Arguments: The Revenue challenged the exclusion, asserting functional similarity. The DRP rejected this, emphasizing the taxpayer's objection and the functional dissimilarity based on evidence.

Conclusions: The DRP's exclusion of the two comparables was upheld by the Tribunal, though the Tribunal did not decide the appeal on merits due to limitation issues.

3. Requirement of Strict Functional Comparability versus Relaxed Comparability under OECD Guidelines:

Relevant Legal Framework and Precedents: OECD Transfer Pricing Guidelines allow for relaxed comparability standards under TNMM, recognizing that exact matches are rare in practice.

Court's Interpretation and Reasoning: The DRP held that strict functional comparability was necessary in this case, contrary to the Revenue's argument relying on OECD guidelines for relaxed comparability.

Key Evidence and Findings: The DRP's detailed functional analysis of comparables indicated that the taxpayer's activities were distinct enough to warrant exclusion of certain comparables, supporting a stricter approach.

Application of Law to Facts: The DRP's insistence on strict comparability was based on the specific facts and functional differences observed, rather than a general disregard of OECD guidelines.

Treatment of Competing Arguments: The Revenue argued for relaxed comparability as per OECD, but the DRP found the taxpayer's objections and functional differences compelling enough to apply stricter standards.

Conclusions: The Tribunal did not explicitly rule on this issue due to the dismissal of the appeal on limitation grounds.

4. Condonation of Delay in Filing Appeal:

Relevant Legal Framework and Precedents: Section 253(3) and (5) of the Act prescribe a 60-day limitation period for filing appeals to the Tribunal, with discretionary power to condone delay upon sufficient cause. Judicial precedents emphasize that "sufficient cause" requires bona fide reasons and that mere workload or departmental restructuring is generally insufficient.

Court's Interpretation and Reasoning: The Tribunal thoroughly examined the Revenue's applications for condonation of delay, which cited immense workload, restructuring, and inadvertent oversight. The Tribunal found these explanations vague, inconsistent, and indicative of negligence rather than bona fide cause.

Key Evidence and Findings: The delay was over 1000 days. The Revenue's applications gave contradictory figures for delay (1021 days and 984 days) and failed to specify the duration or completion of restructuring. The Tribunal noted that workload alone does not constitute sufficient cause without showing direct and unavoidable impediment.

Application of Law to Facts: The Tribunal applied established Supreme Court precedents emphasizing the importance of limitation statutes in ensuring timely justice and discouraging stale claims. It underscored that government departments are under special obligation to act diligently and cannot claim leniency for procedural lapses.

Treatment of Competing Arguments: The Revenue's plea for liberal approach was rejected as the explanations lacked specificity and bona fides. The Tribunal cited authoritative judgments underscoring that condonation of delay is an exception, not a rule, and that negligence or casual approach disqualify such relief.

Conclusions: The Tribunal declined to condone the delay and dismissed the appeal as time-barred without adjudicating the substantive issues.

Significant Holdings:

"The object of the statutes of limitations is to compel a person to exercise his right of action within a reasonable time as also to discourage and suppress stale, fake or fraudulent claims."

"Immense workload never to be treated as sufficient cause and it is unlikely to be a sufficient cause on its own as court may consider factors such as whether the workload was a direct and unavoidable impediment to filing the present appeal."

"Oversight is not a sufficient cause to condone the delay; it is expressed negligence."

"Government departments are under a special obligation to ensure that they perform their duties with diligence and commitment. Condonation of delay is an exception and should not be used as an anticipated benefit for the government departments."

"Where there is no gross negligence, deliberate inaction or lack of bona fide, liberal approach may be adopted to advance substantial justice, but impersonal machinery and bureaucratic methodology cannot be accepted as sufficient cause."

"Length of delay is a relevant matter; once a party loses right to have matter considered on merits due to own inaction, it cannot plead substantial justice over technical considerations."

"Even after sufficient cause is shown, condonation of delay is discretionary and not a matter of right."

"The law of limitation undoubtedly binds everybody, including the Government."

Core Principles Established:

- Strict adherence to limitation periods is essential to ensure timely justice and prevent abuse of process.

- Government departments must act with due diligence and cannot rely on vague or generic reasons such as workload or restructuring for delay.

- Oversight or negligence does not constitute sufficient cause for condonation of delay.

- Functional comparability in transfer pricing must be assessed on facts; strict comparability may be required where functional differences are significant.

- The Tribunal will not entertain appeals filed beyond limitation unless sufficient cause is convincingly demonstrated.

Final Determinations:

- The appeal filed by the Revenue was dismissed as time-barred due to inordinate delay and failure to establish sufficient cause for condonation.

- Consequently, the Tribunal declined to adjudicate the substantive grounds relating to deletion under section 40(a)(i), exclusion of comparables, and the standard of comparability under OECD guidelines.