M/S Huawei Telecommunications (India) Companypvt. Ltd v. The Deputy Director Of Income Tax (Inv.)-4(3), Newdelhi & Ors

$~31 *IN THE HIGH COURT OF DELHI AT NEW DELHI +W.P.(C) 6352/2022 & C.M.Nos.19200/2022 & 29324/2022 M/S HUAWEI TELECOMMUNICATIONS (INDIA) COMPANYPVT. LTD...... Petitioner Through:Mr.Arvind Datar and Mr.TarunGulati, Sr.Advocates with Mr.KishoreKunal, Mr.Manish Rastogi andMs.Ankita Prakash, Advocates. versus THE DEPUTY DIRECTOR OF INCOME TAX (INV.)-4(3), NEWDELHI & ORS...... Respondents ..... Respondents Through:Mr.Zoheb Hossain, Sr.StandingCounsel for the Revenue withMr.Vipul Agrawal and Mr.ParthSemwal, Advocates. %Date of Decision: 30[th]August, 2022 CORAM:HON'BLE MR. JUSTICE MANMOHANHON'BLE MS. JUSTICE MANMEET PRITAM SINGH ARORAJ U D G M E N T MANMOHAN, J (ORAL): 1.Petitioner has filed the present modification application seekingdeletion of para 9(iii) of order dated 21[st]April, 2022 passed by this Courtwhich is as follows: W.P.(C) 6352/2022 “(iii) The Petitioner shall not repatriate any money abroad till thenext date of hearing without leave of this Court.” 2.By way of the order dated 06[th]July, 2022, this Court had noted thesubmissions of the learned senior counsel appearing for the Petitioner to thefollowing effect: “Present application has been filed on behalf of the Petitionerseeking partial modification of the order dated 21st April, 2022passed by this Court in the present matter. Learned senior counsel for the Applicant-Petitioner statesthat the Petitioner has been complying with the conditions laiddown by this Court in the order dated 21st April, 2022. He alsostates that the Petitioner has filed an affidavit of compliance. Hestates that in the regular course of business, the Petitioner hasbeen receiving orders from its customers (primarily being Indiantelecomserviceproviders)forpurchaseoftelecomequipment/services in terms of the customer contracts, whichrequire the Petitioner to import equipment and spare parts fromits overseas suppliers. He further states that these orders areplaced pursuant to long term contracts of the Petitioner and thePetitioner is under contractual and legal obligation to fulfil theseorders. Learned senior counsel for the Petitioner states that eventhough the Petitioner is required to place orders on the overseassuppliers for import of the equipment, on account of condition(iii) of the Order dated 21st April, 2022 imposed by this Court,the Petitioner is not in a position to make any payments to thesaid overseas suppliers. He assures and undertakes to this Courtthat neither dividend nor royalty will be repatriated without theleave of Court. At this stage, learned senior counsel for the petitioner praysand is permitted to place on record additional documents withinthree working days. Issue notice. Mr.Zoheb Hossain, learned counsel for therespondents, accepts notice. W.P.(C) 6352/2022 Reply affidavit, if any, be filed within two weeks. Rejoinderaffidavit, if any, be filed before the next date of hearing.” 3.This Court had issued notice on 06[th]July, 2022 and the Petitioner hadplaced an additional affidavit on record pointing out specific financialconstraints on its business operations on account of the interim order.Pleadings are complete in the said application. The application of thePetitioner seeking partial modification of the interim order has been heardfrom time to time. 4.Learned senior counsel appearing for the Petitioner have made thefollowing submissions: -following submissions: - a.That while the petitioner is receiving foreign exchange from itsoverseas customers, it is unable to make payments to its own supplierswhich is causing grave prejudice to the business interests of the Petitioner.It is submitted that on account of the business activities of the Petitioner,substantial amounts of foreign exchange are being brought into India. 4.Learned senior counsel appearing for the Petitioner have made thefollowing submissions: -following submissions: - a.That while the petitioner is receiving foreign exchange from itsoverseas customers, it is unable to make payments to its own supplierswhich is causing grave prejudice to the business interests of the Petitioner.It is submitted that on account of the business activities of the Petitioner,substantial amounts of foreign exchange are being brought into India. b.That in view of the above submission, the Petitioner is seekingmodification of the order dated 21[st]April, 2022 and praying fordispensation from the condition (iii) imposed by this Hon’ble Court videorder dated 21[st]April, 2022 thereby, permitting the Petitioner to makepayments in order to continue its business operations. c.There is no demand at present for which a protection is sought by theRespondents. The future estimates of demand are without any basis. Thepowers under Section 132(9B) of the Income Tax Act, 1961 (‘the Act’)cannot be used to protect any unsubstantiated future demands. Further, the W.P.(C) 6352/2022 track record of the Petitioner has been exemplary and there are noamounts due from the Petitioner of any outstanding tax dues. d.The Respondents cannot be allowed to restrict the business of thePetitioner by exercising powers under Section 132(9B) which has to beused sparingly and as a last resort as held by the Hon’ble Supreme Courtin Radhakrishnan Industries vs. State of Himachal Pradesh, 2021 (48)GSTL 113 (SC) and followed by several High Courts in the context ofsimilar provisions. e.The onus is on the Respondents to establish that such measures underSection 132 (9B) of the Act are proportionate and are required to protectthe interest of revenue. The onus has not been discharged at all in thepresent case. f.The allegation of non-submission of records is contrary to the recordand is refuted by the Petitioners.They rely upon detailed lists of thedocuments and information submitted to the Respondents during and afterthe search. g.The Petitioner has also undertaken to file a summary of the paymentsto be made and will further furnish the same before this Hon’ble Court onperiodical basis. h.It was further submitted that while the Petitioner will be deeplyprejudiced if the above referred modification is not allowed, no prejudicewill be caused to the Respondents inasmuch as, the interest of the revenueto the extent of Rs. 100 crores is already secured. Further, a refund ofRs.29,76,90,160/- is also pending with the Respondents. Thus, it was W.P.(C) 6352/2022 submitted that no prejudice will be caused to the Respondents if theprayers made in the present application were to be allowed. i.It was also submitted that the assessment proceedings may be madetime bound to ensure early resolution of the disputes. j.It was further submitted that even assuming there was a demand ofRs. 350 crores insofar as the statute itself provides an option of paying20% of the demand if the Petitioner has filed an appeal against theassessment order before the Income Tax Appellate Tribunal under Section254(2A) in terms of the Proviso therein. 5.Per Contra, the senior standing counsel for the Revenue hasvehemently opposed any modification of the order dated 21[st]April, 2022 onthe following grounds: - a.During the course of search proceedings, the books of accounts werenot produced before the authorised officers till 17[th]February, 2022, evenafter the commencement of search action on 15[th]February, 2022. It wassubmitted that the Petitioner is not complying with the legal requirementunder the provisions of Section 128 of the Companies Act 2013 read withRule 3 of Companies (Accounts) Rules, 2014, which prescribes that back-up of the books of account maintained in electronic mode, including at aplace outside India is required to be kept in servers physically located inIndia. Neither such location was conveyed during search nor in response tothe summons dated 31[st]May, 2022. a.During the course of search proceedings, the books of accounts werenot produced before the authorised officers till 17[th]February, 2022, evenafter the commencement of search action on 15[th]February, 2022. It wassubmitted that the Petitioner is not complying with the legal requirementunder the provisions of Section 128 of the Companies Act 2013 read withRule 3 of Companies (Accounts) Rules, 2014, which prescribes that back-up of the books of account maintained in electronic mode, including at aplace outside India is required to be kept in servers physically located inIndia. Neither such location was conveyed during search nor in response tothe summons dated 31[st]May, 2022. b.It has been submitted that there was huge quantum of the importtransactions (exceeding Rs. 19,000 crores in the previous 6 years). In theabsence of the books of accounts (though the same were stated to beproduced as ERP dump of all the transactions undertaken by the company), W.P.(C) 6352/2022Page 5 of 10 it was not possible to determine the veracity of the profit margin disclosedby the petitioner in the telecom/relevant segment, which includes suchimport transactions. If the profit margin in itself is suspect (in the absenceof appropriate books of accounts), there is no reason to consider thetransactions of import to be at arm’s length based on such profit margin. c.It was submitted that while the quantum of likely demand at Rs.350crores had been determined on the basis of issues identified till date, actualdemand is likely to be substantially more with a likely additional income ofRs.1270 crores over and above Rs.1000 crores on identified issues, in viewof the large discrepancies prima facie identified in the books of accountssubmitted by the petitioner before various authorities and the books ofaccounts to be constructed, based on the ERP data dump seized duringsearch, which will have a bearing on the profit margin calculation for thetelecom/relevant segment, which in turn would affect the arm’s lengthprice determination for the international transactions relating to imports ofproducts by the petitioner from its associated enterprises. It was proposedthat to facilitate business of the petitioner, circulating funds of Rs.300crores may be allowed to the petitioner. The payments may be made by thePetitioner in the first instance to its associated parties and importedproducts be received in India, the products be then sold and funds receivedas realization of sale proceeds, upon which funds of Rs.300 crores may bepaid again and the cycle can be repeated. For such a course of action,however, it was proposed that the petitioner may be required to providesecurity for a minimum sum of Rs.350 crores. d.If the petitioner insists on complete removal of restriction on foreignpayments, then suitable security-corresponding to tax on addition amount W.P.(C) 6352/2022 of Rs.2300 crores (Rs 1000 crores on three identified issues and aroundRs.1270 crores on the basis of difference of 5% in profit margins), whichcould be around Rs.800 crores with interest should be provided. e.No leeway for 20% payment is required to be provided in either case,as the stay can be provided by ITAT only after examination of the facts intotality and if balance of convenience is shown to be with the taxpayer. Inthis case deliberate non-production of the books of accounts accompaniedwith huge discrepancies in the data submitted shows that the balance ofconvenience is in favour of the Department. f.That the financials submitted by the petitioner shows that there is nofinancial hardship or shortage of cash flow and that when there is no suchhardship, the obligation to secure the revenue cannot be denied. g.Time-bound assessment, contrary to the statutory limitations, wouldnot be possible since the case may require special audit as well as referenceto the Transfer Pricing Officer and the petitioner may then want to avail theroute of Dispute Resolution Panel (DRP) which are all statutorily time-bound and hence no reduction of such statutory time limits is warranted. f.That the financials submitted by the petitioner shows that there is nofinancial hardship or shortage of cash flow and that when there is no suchhardship, the obligation to secure the revenue cannot be denied. g.Time-bound assessment, contrary to the statutory limitations, wouldnot be possible since the case may require special audit as well as referenceto the Transfer Pricing Officer and the petitioner may then want to avail theroute of Dispute Resolution Panel (DRP) which are all statutorily time-bound and hence no reduction of such statutory time limits is warranted. h.Lastly, it was prayed that this Hon’ble Court may appoint anyindependent expert to draw up the books of accounts of the petitioner onthe basis of the ERP data dump seized during the search, especiallyconsidering claim of the petitioner that such data dump represents theprescribed books of accounts. 6.In rejoinder, the senior counsel on behalf of the Petitioner stronglyrefute the Revenue’s contention that a demand of Rs.1000 crores is likely tobe created by disallowing all the related party transactions of royalty, feesfor technical services and business support services for the entire period of W.P.(C) 6352/2022 ten years. It is contended that the basis of these purported additions havealready been scrutinized and have also been added to the income of thePetitioner in the regular assessments. 7.Having heard the learned senior counsel for the Petitioner and thesenior standing counsel for the Revenue, in view of the fact that thePetitioner has agreed to secure the Respondents, we do not wish to go intothe merits of the allegations and contentions raised. Consequently, tobalance the equities, without going into the merits of the contentions raisedby the respective parties, the present writ petition is being disposed of andaccordingly the previous orders dated 21[st]April, 2022 stands modified to thefollowing extent: - (i)In addition to the Fixed Deposit Receipt of Rs. 100 crores which wasdirected to be made by order dated 21[st]April, 2022, the Petitioner shallprepare another Fixed Deposit Receipt of Rs.100 crores in Axis BankAccount No. 919020017328222, which shall be renewed automaticallyfrom time to time. A photocopy of the said FDR shall be filed with theAssessing Officer within a week. The Banker is also directed to ensurethat the Petitioner and/or any of its officials/nominees/authorisedrepresentatives do not deal with the FDR in any manner. There shall bea lien in favour of the Department with respect to both the FDRs tillconclusion of the assessment proceedings and thereafter the amountwill be dealt in accordance with law. The Bankers will issue a letter tothe AO acknowledging the lien in favour of the Departmentdirected to be made by order dated 21[st]April, 2022, the Petitioner shallprepare another Fixed Deposit Receipt of Rs.100 crores in Axis BankAccount No. 919020017328222, which shall be renewed automaticallyfrom time to time. A photocopy of the said FDR shall be filed with theAssessing Officer within a week. The Banker is also directed to ensurethat the Petitioner and/or any of its officials/nominees/authorisedrepresentatives do not deal with the FDR in any manner. There shall bea lien in favour of the Department with respect to both the FDRs tillconclusion of the assessment proceedings and thereafter the amountwill be dealt in accordance with law. The Bankers will issue a letter tothe AO acknowledging the lien in favour of the Department (ii) The Respondents are directed not to release any refund [which is statedto be to the tune of Rs.30 crores (approx.)] to the Petitioner till theto be to the tune of Rs.30 crores (approx.)] to the Petitioner till the W.P.(C) 6352/2022 assessment proceedings are completed and thereafter the refund shallbe dealt with in accordance with law. (ii) The Respondents are directed not to release any refund [which is statedto be to the tune of Rs.30 crores (approx.)] to the Petitioner till theto be to the tune of Rs.30 crores (approx.)] to the Petitioner till the W.P.(C) 6352/2022 assessment proceedings are completed and thereafter the refund shallbe dealt with in accordance with law. (iii) TheRespondentsaredirectedtocompletetheassessmentasexpeditiously as possible. The parties will be at liberty to apply to thisCourt to seek a variation of this order.expeditiously as possible. The parties will be at liberty to apply to thisCourt to seek a variation of this order. (iv) The Petitioner shall not repatriate any royalty or dividend abroad. ThePetitioner will be at liberty to approach this Court, in case the need soarises.Petitioner will be at liberty to approach this Court, in case the need soarises. (v)The Petitioner shall continue to file its monthly statement with theassessing officer of ‘Payments Received as well as Made’.assessing officer of ‘Payments Received as well as Made’. 8.Though a suggestion is made by the Counsel for the Respondent thatthe Assessing Officer will be free to take recourse having the books ofaccounts of the Petitioner audited by an expert, yet the said suggestion isstrongly refuted by the senior counsel for the Petitioner. As indicated by us,we are not dealing with the merits of the rival contentions taken in theseproceedings and the assessing officer will take such steps as are available tohim, in accordance with law. 9.It is made clear that the above order has been passed on the basis ofoffer made by the Petitioner and will not be considered as a precedent in anyother proceeding. 10.Accordingly, the attachment orders dated 17[th]February, 2022 and 19[th]February, 2022 and this Court’s order dated 21[st]April, 2022 are modified inthe manner stated above. However, this order shall come into effect fromthe date the Petitioner deposits the additional 100 crores in terms of para 7(i)above. Upon deposit of the said sum, the Assessing Officer will withdrawthe attachment orders dated 17[th]February, 2022 and 19[th]February, 2022 and W.P.(C) 6352/2022 will communicate the same to the parties to whom attachment orders wereserved. With the above directions, present writ petition and pendingapplications stand disposed of. MANMOHAN, J AUGUST 30, 2022KA MANMEET PRITAM SINGH ARORA, J W.P.(C) 6352/2022