TaxTMI 
TaxTMI 
2015 (2) TMI 662
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....s. 147 and 144C of the Income-tax Act, 1961 ["the Act'] in pursuance of the directions of the learned Dispute Resolution Panel, Pune ["DRP"] dated August 29, 2012 for the assessment year 2007-08 on the following among other grounds: 1. Inappropriate re-opening of the assessment under section 148 of the Act 1.1 The learned ACIT pursuant to the directions of the learned DRP erred in law and on the facts and in circumstances of the case in re-opening the assessment under section 148 of the Act. 2. Transfer Pricing adjustment 2.1 The learned ACIT pursuant to the directions of the learned DRP erred in law and on the facts and in circumstances of the case in making an adjustment amounting to Rs. 17,570,070/- to the value of international transactions entered into by the Appellant with its Associated Enterprise in respect of provision of Information Technology Enabled Services ("ITES"). 3. Inappropriate calculation of operating margin of comparable companies 3.1 The learned ACIT pursuant to the directions of the learned DRP erred in calculating the average operating margin of comparable companies. 4. Inappropriate calculation of working capital adjustment 4.1 T....
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....ceedings by issuance of notice u/s 148 of the Act is bad in law and therefore the consequent assessment order is liable to be set-aside. Since the aforesaid issue goes to the root of the matter, the same is being adjudicated at the threshold. 4. The pertinent facts, which are relevant to adjudicate the aforesaid dispute can be summarized as follows. The appellant before us is a company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia, engaged in the business of providing Information Technology enabled services. For the assessment year under consideration, it filed a return of income on 05.11.2007 declaring a total income of Rs. 2,15,31,701/-. The said return of income was duly processed u/s 143(1) of the Act. The said return was not picked-up for scrutiny assessment because no notice u/s 143(2) of the Act was issued by the Assessing Officer within the period prescribed in clause (ii) of sub-section (2) of section 143 of the Act, as it stood at the relevant point of time. On 14.01.2011, the Assessing Officer recorded reasons in terms of section 147 of the Act and formulated a belief that certain income chargeable to tax had escaped assessment for th....
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....y the assessee. The case satisfies conditions laid down in sections 149(1)(a) and 151(2) of the Income-tax Act, 1961. Issue notice u/s.148 for A.Y." 5. A perusal of the aforesaid reasons recorded show that as per the Assessing Officer, the TPO vide order u/s 92CA(3) of the Act dated 29.10.2010 had worked out the adjustment in relation to international transaction of Rs. 2,49,43,811/- on a reference made to him by the Assessing Officer u/s 92CA(1) of the Act. In view of the aforesaid order of the TPO, according to the Assessing Officer, income chargeable to tax has escaped assessment relating to the adjustment of Rs. 2,49,43,811/- to the total income. In nutshell, the Assessing Officer has formed a belief about escapement of income based on the order of the TPO u/s 92CA(3) computing adjustment in relation to the international transactions of the assessee with its associated enterprises. 6. In the above background, now we may briefly record the contentions of the assessee challenging the validity of the proceedings initiated by issuance of notice u/s 148 of the Act and the defense mounted by the learned CIT-DR to support the initiation of proceedings. The learned counsel ....
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....ion 147 of the Act has to be that of the Assessing Officer alone and not that of any other authority. By referring to the reasons recorded, it is sought to be pointed out that the only assertion of the Assessing Officer to conclude that he has 'reason to believe' that certain income chargeable to tax has escaped assessment is the fact that the TPO has worked out an adjustment of Rs. 2,49,43,811/- in relation to the arm's length price of the international transactions. It is contended that the aforesaid does not fulfill the jurisdictional requirements of section 147 of the Act, which prescribe that the Assessing Officer has to have a 'reason to believe' that certain income chargeable to tax had escaped assessment. It is contended that in the instant case, the belief that any income of the assessee has escaped assessment is clearly not that of the Assessing Officer but it is that of the TPO and hence the impugned reasons recorded are contrary to the requirements of section 147 of the Act and deserve to be struck down. 9. Lastly, it is contended that the reasons recorded are without any application of mind by the Assessing Officer and on this count also the reop....
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....onest and void ab initio. The fundamental point canvassed by the appellant is that the reference u/s 92CA made by the Assessing Officer to the TPO for computing the arm's length price was invalid because when the reference was made on 14.09.2009, no assessment proceedings were pending in relation to the instant assessment year. 12. At this stage, it would be appropriate to consider whether the reference made by the Assessing Officer to the TPO on 14.09.2009 for determination of arm's length price is valid or not ? For the said purpose, we may briefly touch-upon the relevant provisions relating to the transfer pricing assessment which are contained in sections 92 to 92F of the Act under Chapter - X relating to the "Special Provisions Relating To Avoidance Of Tax". Sections 92 to 92F of the Act were introduced by the Finance Act, 2001 and are effective from the assessment year 2002-03. Section 92(1) of the Act provides that any income arising from an international transaction between associated enterprises shall be computed having regard to the arm's length price. Sections 92A and 92B of the Act contain provisions relating to the meaning of the expressions "associated ....
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....nsaction to the TPO. In such a situation, the TPO, after taking into account the material before him, pass an order in writing u/s 92CA(3) of the Act determining the arm's length price in relation to an international transaction. On receipt of this order, sub-section (4) of section 92CA of the Act requires the Assessing Officer to compute the total income of the assessee in conformity with the arm's length price so determined by the TPO. In other words, the determination of the arm's length price, wherever a reference is made to him, is done by the TPO under sub-section (3) of section 92CA but the computation of total income having regard to the arm's length price so determined by the TPO is required to be done by the Assessing Officer under sub-section (4) of section 92C, read with sub-section (4) of section 92CA. 14. In sum and substance, the scheme of the Act postulates that arm's length price in relation to an international transaction is determined either by the Assessing Officer as provided in sub-section (3) of section 92C or by the TPO u/s 92CA(3) of the Act where a reference is made to him by the Assessing Officer. In both situations, the Assessing O....
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....oceedings, wherein he is determining the total income of the assessee. The appellant has canvassed the aforesaid position before us and in this context reference has also been made to the CBDT Instruction No.3 dated 20th May, 2003 the relevant portion of which read as under :- " ". . . . . The Central Board of Direct Taxes, therefore, have decided that wherever the aggregate value of international transaction exceeds Rs. 5 crores, the case should be picked up for scrutiny and reference under section 92CA be made to the TPO. If there are more than one transaction with an associated enterprise or there are transactions with more than one associated enterprises the aggregate value of which exceeds Rs. 5 crores, the transactions should be referred to the TPO. Before making reference to the TPO, the Assessing Officer has to seek approval of the Commissioner/Director as contemplated under the Act. Under the provisions of section 92CA reference is in relation to the international transaction. Hence all transactions have to be explicitly mentioned in the letter of reference. Since the case will be selected for scrutiny before making reference to the TPO, the Assessing Officer may procee....
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.... submitted that the CBDT norms also provide that a case which is not directly covered under the aforesaid compulsory scrutiny norm, can also be selected for scrutiny if the Assessing Officer records a satisfaction and seeks the approval of the CCIT/DGIT (International Taxation)/DGIT (Exemption). The aforesaid norm has been pointed out to say that in order to pick-up a case for scrutiny, some satisfaction is required to be recorded before the notice u/s 143(2) of the Act is to be issued. This exercise, according to the Ld. CIT-DR, could very well be the reference of the matter of the TPO, therefore, the stipulated period laid down by the CBDT does not pre-suppose that the issue of notice u/s 143(2) of the Act has to be necessarily and without fail precede the reference to TPO. 19. We have carefully considered the plea of the Ld. CIT-DR, that it is open to the Department to make a reference to the TPO without issuing notice u/s 143(2) of the Act, but in our view, it is not supported by a schematic reading of the relevant Provisions relating to the transfer pricing assessment contained in sections 92 to 92F. The entire purpose of computation of arm's length price in relation to....
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.... before a reference to the TPO can be made for computation of arm's length price in relation to an international transaction. In this context, reference has been made to the phraseology of section 92CA(1) of the Act to say that only two conditions are prescribed therein which are to be fulfilled by the Assessing Officer before referring the matter to the TPO. Firstly, assessee should have entered into international transaction; and, that if the Assessing Officer considers it necessary and expedient to do so, he may refer the matter to the TPO under approval of the Commissioner. If both the conditions are satisfied there is no bar or requirement of any assessment proceedings being pending, before the reference is made to the TPO. 22. The aforesaid plea of the Ld. CIT-DR also, in our view, fails to take into consideration the entire scheme envisaged for the transfer pricing assessment in sections 92 to 92F of the Act. The provisions of sections 92 to 92F of the relate to computation of income from the international transaction having regard to the arm's length price, meaning of associated enterprises, meaning of international transaction, determination of arm's length ....
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.... year 2007-08 and assessee filed its return of income on 05.11.2007. In terms of clause (ii) to sub-section (2) of section 143 of the Act, as it stood at the relevant point of time, notice u/s 143(2) of the Act in order to subject the return of income to scrutiny assessment, should have been issued within this six months from the end of the relevant assessment year i.e. upto 30.09.2008. There is no dispute that no such notice has been issued within the above stipulated period. A consequence of the aforesaid situation is that the return of income filed by the assessee on 05.11.2007 became final as no scrutiny proceedings were started within the period stipulated in law. The aforesaid position is also reinforced by the CBDT Circular No.549 dated 31.10.1989. As per the CBDT, if, after furnishing return of income, an assessee does not receive a notice u/s 143(2) of the Act from the Department within period stipulated in the proviso to section 143(2) of the Act, it follows that the return filed by the assessee has become final and no scrutiny proceedings should be started in respect of that return. In other words, in the present case, assessment proceedings u/s 143 of the Act came to en....
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....thin the meaning of section 147 of the Act. 29. In this context, the Ld. CID-DR has vehemently pointed out that the return of income filed by the assessee included international transactions entered with the associated enterprise and such return of income was required to be taken-up for compulsory scrutiny, as per the norms of the CBDT relating to assessment year 2007-08. Therefore, when such a return of income was not picked up for a scrutiny assessment within the stipulated period, the only course for the Revenue was to issue notice u/s 148 of the Act on the ground that certain income chargeable to tax has escaped assessment. Secondly, it is pointed out that the return of income was filed by the assessee on 05.11.2007 with Circle 11(2), Pune whereas Form No.3CEB for the same assessment year was filed in Circle 1(1), Pune on 31.10.2007. It is only on 28.07.2009, Form No.3CE B was received by the present Assessing Officer i.e. Circle 1(1) wherein it was seen that assessee had entered into international transactions with associated enterprises. For this reason, the case of the assessee had escaped from compulsory selection for scrutiny. On this basis, it is sought to be pointed o....
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....nn.com 466 (Delhi) wherein it has been held that a Court is to be guided only by the reasons recorded for re-assessment and not by the reasons or explanation given by the Revenue at a later stage in respect of the notice of re-assessment. The Hon'ble Delhi High Court after making a reference to the following judgements :- (i) Jamna Lal Kobra v. ITO [1968] 69 ITR 461 (All.); (ii) CIT v. Agarwalla Bros. [1991] 189 ITR 786 (Pat.); (iii) G.M. Rajgharia v. ITO, (1975) 98 ITR 486 (Pat.); (iv) Asa John Devinathan v. Addl. CIT, (1980) 126 ITR 270 (Mad.); (v) East Coast Commercial Co. Ltd. v. ITO, [1981] 128 ITR 326 (Cal.); (vi) Equitable Investment Co. (P.) Ltd. v. ITO, [1988] 174 ITR 714 (Cal.); and, (vii) S. Sreeramachandra Murthy v. DCIT, [2000] 243 ITR 427 (AP). held as under :- "The ratio laid down in all these cases is that, having regard to the entire scheme and purpose of the Act, the validity of the assumption of jurisdiction under Section 147 can be tested only by reference to the reasons recorded under Section 148(2) of the Act and the Assessing Officer is not authorized to refer to any other reason even if it can be otherwise inferred and/or gathe....
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....sy in the present case has to be adjudicated in the light of the parameters of section 147/148 of the Act. In a somewhat similar situation, the Hon'ble Rajasthan High Court in the case of Brig B. Lal v. WTO, 127 ITR 308 (Raj.) was dealing with a situation where the reopening of assessment was based on a report submitted by the Valuation Officer in an invalid reference. As per the Hon'ble High Court, a report submitted by the Valuation Officer in an invalid reference must be treated as a nullity in the eyes of law, nonest and void ab initio. According to the Hon'ble High Court, where the reopening of assessment was based on such illegal, null and void report, the entire fabric for reopening of the assessment proceedings falls flat. In our considered opinion, the ratio of the judgement of the Hon'ble Rajasthan High Court in the case of Brig B. Lal (supra) is squarely applicable in the present case. Therefore, having regard to the peculiar facts of the present case, the proposition sought to be canvassed by the Ld. CIT-DR based on the decision in the case of Pooran Mal (supra) does not validate the issuance of notice u/s 148 of the Act to reopen the assessment in the p....