2013 (5) TMI 417 - HC - Income Tax

Tribunal decision upheld: Reassessment invalid without substantiated reasons for adding income

Commissioner of Income-Tax-I Versus Cheil Communications India Pvt. Ltd.

The High Court upheld the Tribunal's decision that the reassessment was invalid as no additions were made based on the reasons for reopening. The Court ... Re opening of assessment - Transfer Pricing Officer had determined the Arm’s Length Price on the basis of which the addition to the extent of Rs 1,20,20,160/- had been made by the AO - Held that:- From a look at Form No.3CEB which was filed alongwith the return by the assessee would indicate that the transactional net margin method had been followed as the most appropriate method. Form No.3CEB is nothing but the report from the accountant to be furnished under Section 92E relating to international transactions filed alongwith the return and, therefore, there was compliance on the part of the assessee with the provisions of Section 92E. There was no material whatsoever before the Assessing Officer when the purported reasons were recorded to indicate that the Arm’s Length Price determined by the assessee was not correct. In fact, there is not even an allegation that the Arm’s Length Price determined by the assessee was not correct. Therefore assessee's conclusion are acceptable that the purported reason of determination of the Arm’s Length Price, as given in the reasons for reopening the assessment, was not a reason at all. AO could proceed to determine the Arm’s Length Price only if there was a fault found with the determination of the Arm’s Length Price by the assessee. If the Assessing Officer were to form such an opinion, then he could either determine the Arm’s Length Price himself or he could refer the matter for computation of the Arm’s Length Price to the Transfer Pricing Officer under Section 92CA. Thus in agreement with the contention of assessee that, following the decisions in Jet Airways (2010 (4) TMI 431 - HIGH COURT OF BOMBAY) and Ranbaxy Laboratories Limited (2011 (6) TMI 4 - DELHI HIGH COURT ) there could not have been an addition on account of Arm’s Length Price as the only two purported reasons regarding claim of loss on account of foreign exchange fluctuations and the claim of expenses on account of “data usage charges” had not resulted in any addition. In favour of assessee. Issues Involved:1. Reopening of assessment under Section 147 of the Income Tax Act, 19612. Validity of reasons for reopening the assessment3. Arm's Length Price determination in international transactions4. Addition of income not mentioned in the reasons for reopeningIssue-wise Detailed Analysis:1. Reopening of assessment under Section 147 of the Income Tax Act, 1961:The appeal by the revenue was directed against the order of the Income Tax Appeal Tribunal, which had held that the reopening of assessment was bad in law. The primary question was whether the Tribunal erred in holding that the reopening of the assessment was invalid, given that the ultimate order by the Assessing Officer (AO) did not include the items originally cited for reassessment.2. Validity of reasons for reopening the assessment:The AO had issued a notice under Section 148 for reopening the assessment based on three discrepancies: (a) foreign exchange fluctuation loss, (b) data usage charges, and (c) determination of Arm's Length Price (ALP) for international transactions. However, the Tribunal found that no additions were made concerning the first two items in the final assessment order. The Tribunal noted that the reasons provided for reopening the assessment did not survive, as no additions were made based on those reasons.3. Arm's Length Price determination in international transactions:The appellant argued that the Tribunal ignored the issue of ALP determination, which was mentioned in the reasons for reopening. The Tribunal observed that the AO's reasons for reopening did not constitute a valid reason as there was no tangible material indicating that the ALP determined by the assessee was incorrect. The Tribunal emphasized that the AO must have some material, information, or document to form an opinion that the ALP was not correctly determined by the assessee.4. Addition of income not mentioned in the reasons for reopening:The Tribunal and the High Court both referred to the legal principle that if the AO does not assess or reassess the income for which the assessment was reopened, he cannot independently assess other income that comes to his notice during the reassessment proceedings. This principle was supported by the decisions in Jet Airways and Ranbaxy Laboratories Limited, which held that the AO must assess or reassess the income that was the basis for reopening the assessment before assessing any other income.Conclusion:The High Court agreed with the Tribunal's conclusion that the reopening of the assessment was invalid, as the reasons for reopening did not result in any additions. The court held that the AO lacked jurisdiction to make any additions, including those related to the ALP, as the primary reasons for reopening were not substantiated. Consequently, the appeal was dismissed, and the question was answered in favor of the assessee, with no order as to costs.