2008 (12) TMI 67 - HC - Income Tax

Reassessment upheld where post-assessment material including TPO findings provided rational basis; AO may compute ALP or refer under ss.148, 92CA(3)

HC dismissed the petition and upheld notices under ss.148 and 92CA(3), holding reassessment valid where post-assessment material (including a Transfer ... Quashing of notices under Sections 148 and 92CA(3) - Inapplicability of unamended provisions of Section 92 - bar to reassessment of escaped income - reasons for reassessment for period prior to introduction of amended Chapter X in the Act - allegation of transfer of profits out of India or evasion of tax - Requirement of an opportunity of being heard - determining arm's length price - HELD THAT:- To that limited extent, the Court may look into the conclusion arrived at by the Income-tax Officer and examine whether there was any material available on the record from which the requisite belief could be formed by the Income-tax Officer and further whether that material had any rational connection or a live link for the formation of the requisite belief. It would be immaterial whether the Income-tax Officer at the time of making the original assessment could or, could not have found by further enquiry or investigation, whether the transaction was genuine or not, if on the basis of subsequent information, the Income-tax Officer arrives at a conclusion, after satisfying the twin conditions prescribed in S. 147(a) of the Act, that the assessee had not made a full and true disclosure of the material facts at the time of original assessment and therefore income chargeable to tax had escaped assessment. We thus, answer question No.(i) against the petitioner and in favour of the respondents and hold that there is no infirmity in the notice proposing reassessment. The Assessing Officer will be at liberty to pass an appropriate order of assessment, subject to the rights and remedies of the assessee. Order of Transfer Pricing Officer can certainly have nexus for reaching the conclusion that income has been incorrectly assessed or has escaped assessment. In the present case, the said material came to the notice of the Assessing Officer subsequent to the assessment. There is no grievance that provisions of Sections 148 to 153 of the Act have not been followed. In such a situation, it cannot be held that the notice proposing reassessment is vitiated merely because one of the reasons referred to order of Transfer Pricing Officer. The income arising from international transaction is to be computed having regard to arm's length price as per guidelines laid down in Section 92C of the Act by adopting one of the laid down methods, at the discretion of the competent authority. Mere fact that the assessee has chosen one of the said methods, does not take away the discretion to select any other method which may be considered to be more appropriate for the purpose of determining the true income. Proviso to Section 92C (3) of the Act provides for an opportunity to the assessee as to why arm's length price should not be determined as proposed. Under Section 92CA of the Act, the Assessing Officer can make a reference on the issue of computation of arm's length price to a Transfer Pricing Officer. The Transfer Pricing Officer is required to issue notice to the assessee to lead evidence for determining what was the arm's length price. There is always a possibility of transaction between a non resident and its associates being under-valued and having regard to such tendency, a provision that income arising out of said transaction could be computed having regard to arm's length price, will not be open to question and is within the legislative competence to effectuate the charge of taxing real income in India. We, thus, do find any merit whatsoever in the contention that provisions of Chapter X cannot be made applicable to parties which are subject to jurisdiction of taxing authorities in India, without there being any material to show transfer of profits outside India or evasion of tax between the two parties. The contention that according to the permission granted by the Reserve Bank of India under the FERA, the assessee cannot charge more than particular price, can also not control the provisions of the Act, which provides for taxing the income as per the said provision or computation of income, having regard to arm's length price in any international transaction, as defined. Even earlier, the assessee is given due opportunity by the Transfer Pricing Officer. There is thus no difference, as far as opportunity is concerned, whether computation is made by the Assessing Officer himself or by the Transfer Pricing Officer. No doubt quasi judicial authorities are expected to act as per principles of natural justice in all matters, it depends on context of a statutory provision whether opportunity is sufficient. Even in absence of any statutory provision, requirement of giving an opportunity can be inferred if a person is adversely affected. When it is a matter of assessment by one or other officer and the assessee is to be provided opportunity, in the course of the assessment, we do not find any merit for inferring further opportunity at the stage of decision of the question, whether the Assessing Officer himself is to compute the arm's length price or to make a reference to the Transfer Pricing Officer for the said purpose. Accordingly, the writ petition is dismissed. Issues Involved:1. Inapplicability of unamended provisions of Section 92 of the Act to the petitioner and reassessment of escaped income.2. Relevance of the order passed by the Transfer Pricing Officer under Chapter X for reassessment of the period prior to the introduction of amended Chapter X.3. Applicability of Chapter X provisions when both parties to a transaction are subject to tax in India, without allegations of profit transfer out of India or tax evasion.4. Requirement of an opportunity of being heard before referring the matter of determination of arm's length price to the Transfer Pricing Officer.Detailed Analysis:Issue 1: Inapplicability of Unamended Provisions of Section 92 and Reassessment of Escaped IncomeThe petitioner contended that the unamended Section 92 of the Act, which was not applicable to non-residents for the period relevant to assessment years from 1998-99 to 2001-02, should bar reassessment of escaped income. The court held that Section 147 of the Act, which allows reassessment if the Assessing Officer believes income has escaped assessment, is not controlled by Section 92. The court stated, 'The said provision is not in any manner controlled by Section 92 of the Act nor there is any limit to consideration of any material having nexus with the opinion on the issue of escapement of assessment of income.' The court concluded that the notice for reassessment was valid and that the Assessing Officer could legitimately form an opinion based on relevant material, including the Transfer Pricing Officer's order.Issue 2: Relevance of Transfer Pricing Officer's Order for ReassessmentThe court found no objection to the Assessing Officer considering the Transfer Pricing Officer's order for forming an opinion on escaped income. The court stated, 'Order of Transfer Pricing Officer can certainly have nexus for reaching the conclusion that income has been incorrectly assessed or has escaped assessment.' The court emphasized that any relevant material could be considered for reassessment, and the notice proposing reassessment was not vitiated merely because it referred to the Transfer Pricing Officer's order.Issue 3: Applicability of Chapter X ProvisionsThe petitioner argued that Chapter X provisions should not apply when both parties to a transaction are subject to tax in India, without allegations of profit transfer out of India or tax evasion. The court rejected this argument, stating that the provisions of Chapter X are applicable to 'international transactions' as defined under Section 92B, which includes transactions between associated enterprises, at least one of whom is a non-resident. The court held, 'There is no lack of Legislative competence for enacting the said provisions and making them applicable to the petitioner or to a class of persons falling in the category of the petitioner.' The court concluded that the provisions advance the object of taxing real income and are applicable to the petitioner.Issue 4: Requirement of Opportunity of Being Heard Before Reference to Transfer Pricing OfficerThe petitioner contended that they should have been given an opportunity to be heard before the matter was referred to the Transfer Pricing Officer. The court found no merit in this contention, stating, 'The decision to make a reference does not in any manner visit the assessee with any civil consequence.' The court emphasized that the decision to refer the matter is an administrative one and does not affect the assessee's rights, as they would still have the opportunity to challenge the computation of arm's length price at higher levels.Conclusion:The court dismissed the writ petition, holding that:1. The notice for reassessment was valid and not barred by the inapplicability of unamended Section 92.2. The Transfer Pricing Officer's order could be considered for reassessment.3. Chapter X provisions are applicable to the petitioner, even if both parties are subject to tax in India.4. There was no requirement for an opportunity of being heard before referring the matter to the Transfer Pricing Officer.