Facts of the Case

  • The petitioners, Sony Mobile Communications India Pvt. Ltd. and Sony India Pvt. Ltd., challenged the tax demand raised for Assessment Year 2013–14.
  • The demand arose pursuant to Transfer Pricing adjustments made by the Transfer Pricing Officer (TPO) and finalized by the Assessing Officer (AO).
  • The petitioners contended that:
    • They were entitled to refunds for other assessment years.
    • The TPO committed errors, including:
      • Improper application of intensity test / AMP adjustments.
      • Failure to consider advertisement expenses and reimbursements correctly.
  • Appeals against such adjustments were already pending before the Income Tax Appellate Tribunal (ITAT).
  • The grievance arose because:
    • Stay of demand was not fully granted by ITAT, and
    • The department was seeking to recover demand and adjust refunds.

Issues Involved

  1. Whether the tax demand raised based on TPO adjustments should be enforced during pendency of appeal before ITAT.
  2. Whether the Income Tax Department can adjust refunds against such disputed demand.
  3. Whether balance of convenience justifies protection to the assessee during litigation.

Petitioner’s Arguments

  • The Intensity Test / AMP adjustment applied by TPO is not a recognized method under transfer pricing provisions.
  • There was non-application of mind by TPO:
    • Advertisement expenses (₹29.31 crore) were ignored.
    • Reimbursements (₹127 crore) were wrongly treated.
  • Rectification applications were wrongly rejected on technical grounds.
  • Petitioners had already:
    • Declared substantial profits
    • Paid significant taxes
  • Therefore:
    • Recovery of demand is unjustified during pendency of appeal
    • Refunds should not be adjusted arbitrarily

Respondent’s Arguments

  • The Revenue relied upon:
    • Assessment Order finalized after due process
    • Orders of ITAT
  • It contended that:
    • Demand was a natural consequence of finalized assessment
    • Recovery proceedings were legally valid

Court’s Order / Findings

The Delhi High Court held:

  • Since:
    • Appeals are pending before ITAT, and
    • Both demand and refund claims exist simultaneously,

 The balance of justice requires status quo.

Directions Issued:

  1. Demand Recovery Stayed
    • The department shall not enforce tax demand arising from AY 2013–14.
  2. No Adjustment of Refunds
    • The department shall not adjust refunds due to the petitioners against such demand.
  3. Expedited ITAT Proceedings
    • ITAT directed to:
      • Complete hearing expeditiously
      • Pass final order without delay (outer timeline indicated).
  4. Status Quo Maintained
    • Interim protection continued till disposal of appeal.

Important Clarification

  • The Court clarified that:
    • Pendency of appeal does not automatically justify recovery, especially where disputes are substantial.
    • At the same time:
      • Assessee cannot insist on refund release if demand is disputed
  • Hence, mutual restraint principle applied:
    • No recovery
    • No refund adjustment

Sections Involved

  • Section 92C – Arm’s Length Price determination
  • Section 92CA – Reference to Transfer Pricing Officer
  • Section 143(3) – Assessment
  • Section 220 – Demand & recovery
  • Section 245 – Adjustment of refunds
  • Section 254 – ITAT powers

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2019:DHC:41-DB/SRB07012019CW31742018.pdf

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