2024 (2) TMI 1557 - HC - Income Tax

Transfer pricing assessment reopening invalid when based on change of opinion rather than undisclosed material facts

Sanofi India Limited, (formerly known as Aventis Pharma Limited) Versus The Deputy Commissioner of Income Tax and 3 Ors.

The Bombay HC held that reopening of assessment for TP adjustment was invalid as it was based on change of opinion rather than failure to disclose ... Reopening of assessment - TP Adjustment - computation of the arm's length price (ALP) in respect of international transactions with associate enterprises (AEs), thereby justifying reopening - HELD THAT:- As held in Calcutta Discount Company Limited [1960 (11) TMI 8 - SUPREME COURT (LB)] the duty of an assessee does not extend beyond the full and truthful disclosure of all primary facts. Once all the primary facts are before the Assessing Authority, it requires no further assistance by way of disclosure. It is for the AO to decide what inferences of facts can reasonably be drawn and what legal inferences have ultimately to be drawn. The duty of assessee, the Court held, is to disclose fully and truly all primary relevant facts, it does not extend beyond that. In N.D. Bhatt Inspecting ACIT [1993 (7) TMI 7 - BOMBAY HIGH COURT] this Court relying on Indian Oil Corporation v. Income Tax Officer, Central Circle v. Calcutta [1986 (5) TMI 1 - SUPREME COURT] observed that assessee is under an obligation to disclose only all basic facts and assessee cannot be expected to draw any inference or to disclose any inference to be made from these basic facts. The Court also observed that assessee must be aware of those facts, which are not disclosed before it can be said that there is any omission or failure on his part to disclose the same. In this case, there is not even an allegation that assessee was aware of the prices at which the third party companies had imported glime pride and analgin. Reasons also do not record how assessee must have been aware of those facts. The fact is, a transfer pricing study was submitted by assessee and the TPO has accepted it. Based on the order under Sub-section (3) of Section 92CA of the Act from the TPO, the AO has proceeded to compute the total income of assessee under Sub-section (4) of Section 92C of the Act in conformity with the ALP as determined by the TPO. There is nothing to indicate that there was any failure on the part of assessee to truly and fully disclose any material fact. It has also to be noted that once a query is raised during the assessment proceedings and assessee has replied to it, it follows that the query raised was subject of consideration of the AO while completing the assessment. From the reasons recorded, it is rather obvious that reopening of assessment by the impugned notice is merely on the basis of ‘change of opinion’ and that ‘change of opinion’ does not constitute justification and/or reasons to believe that income chargeable to tax has escaped assessment. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court were:Whether the reopening of the assessment for Assessment Year (AY) 2007-08 under Section 148 of the Income Tax Act, 1961 ('the Act') was valid, given that the notice was issued more than four years after the end of the relevant assessment year and an assessment under Section 143(3) had already been completed.Whether the proviso to Section 147 of the Act, which restricts reopening beyond four years unless there is a failure to truly and fully disclose material facts, was satisfied in this case.Whether the petitioner failed to disclose primary facts material to the computation of the arm's length price (ALP) in respect of international transactions with associate enterprises (AEs), thereby justifying reopening.Whether reliance on third-party prices, which the petitioner allegedly was not aware of, could constitute a valid reason to believe income had escaped assessment.The scope of the duty of an assessee regarding disclosure of facts and whether the petitioner was obligated to disclose inferences or facts not known to it.The validity of reopening based on a 'change of opinion' by the Assessing Officer (AO) and whether such change of opinion can constitute a reason to believe income has escaped assessment.2. ISSUE-WISE DETAILED ANALYSISValidity of Reopening Assessment under Section 148 beyond Four Years and Application of Proviso to Section 147The reopening notice under Section 148 was issued on 11th November 2013, more than four years after the end of AY 2007-08. The proviso to Section 147 restricts reopening beyond four years unless there is a failure to truly and fully disclose material facts necessary for assessment. The Court examined whether this condition was met.The legal framework mandates that reopening beyond four years requires the AO to have a reason to believe that income has escaped assessment due to failure on the part of the assessee to disclose material facts fully and truly. The Court referred to precedents which emphasize that the assessee must disclose all primary facts, but is not obliged to disclose inferences or facts not known to it.The Court found that the reopening was based on information alleging that the petitioner imported raw materials from its AEs at prices far exceeding the ALP, citing third-party prices as benchmarks. However, there was no allegation or evidence that the petitioner was aware of these third-party prices or failed to disclose any primary facts related to these transactions.Duty to Disclose Primary Facts vs. InferencesRelying on the Supreme Court decision in Calcutta Discount Company Limited v. ITO, the Court reiterated that the assessee's duty is limited to full and truthful disclosure of primary facts. The AO must draw inferences independently. The Court also cited the Division Bench ruling in N.D. Bhatt Inspecting ACIT v. I.B.M. World Trade Corporation, which held that an assessee cannot be expected to disclose inferences or facts not known to it.In this case, the petitioner had submitted a transfer pricing study prepared by a reputed firm, which was accepted by the Transfer Pricing Officer (TPO) under Section 92CA(3). The AO's assessment under Section 143(3) was based on this acceptance. The reopening notice did not demonstrate any failure by the petitioner to disclose primary facts; rather, it was predicated on a 'change of opinion' by the AO regarding the correctness of the transfer pricing study.Reliance on Third-Party Prices Not Known to PetitionerThe reopening was premised on information that the petitioner paid prices to its AEs far exceeding third-party prices for the same raw materials. However, the Court noted that the petitioner was not shown to be aware of these third-party prices at the relevant time. The reasons recorded for reopening did not explain how the petitioner could have disclosed facts it was unaware of. Therefore, the reopening could not be justified on this basis.Reopening Based on 'Change of Opinion'The Court emphasized that a mere change of opinion by the AO does not constitute a valid reason to believe that income has escaped assessment. The reopening notice and reasons recorded indicated that the AO's action was based on a reassessment of the transfer pricing methodology and prices, which had already been accepted in earlier proceedings.The Court held that such change of opinion cannot justify reopening under Section 148, especially where the proviso to Section 147 applies.Application of Law to Facts and Treatment of Competing ArgumentsThe petitioner argued that it had fully disclosed all primary facts related to international transactions with AEs, submitted transfer pricing documentation, and cooperated with the TPO and AO. The AO's reliance on subsequent years' transfer pricing studies and third-party prices unknown to the petitioner was insufficient to establish failure to disclose.The respondents contended that new material had come to light indicating overpayment to AEs and income escaping assessment. The Court found this argument unpersuasive in the absence of any failure by the petitioner to disclose facts known to it.3. SIGNIFICANT HOLDINGSThe Court held:'The duty of an assessee does not extend beyond the full and truthful disclosure of all primary facts. Once all the primary facts are before the Assessing Authority, it requires no further assistance by way of disclosure. It is for the AO to decide what inferences of facts can reasonably be drawn and what legal inferences have ultimately to be drawn.''There is nothing to indicate that there was any failure on the part of assessee to truly and fully disclose any material fact. The reopening of assessment by the impugned notice is merely on the basis of 'change of opinion' and that 'change of opinion' does not constitute justification and/or reasons to believe that income chargeable to tax has escaped assessment.'The Court concluded that the reopening notice issued under Section 148 was invalid as the conditions under the proviso to Section 147 were not satisfied. The petitioner had fully disclosed primary facts, and the AO's action was based on a mere change of opinion, which is impermissible.The writ of certiorari quashing the reopening notice and the order rejecting objections was made absolute, and the petition was disposed of without costs.