TaxTMI 
TaxTMI 
2015 (7) TMI 470
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....,88,428 towards sale commission. Out of this Rs. 2,59,75,156 is towards commission payable to Venture Global on the sales made to M/s Satyam Computer Services Ltd and its affiliates. The TPO and the AO allowed the entire commission, while passing orders u/s 92CA(3) and 143(3) respectively as claimed by the assessee. The said commission payable/paid to M/s. Global Engineering of USA (Venture Global) on sales made to M/s Satyam Computer Services Ltd (SCSL) and M/s. Satyam Manufacturing Technologies Inc. etc., was issue under consideration in the revision proceedings. The CIT observed that it was evident that "Venture Global" being one of the parent companies in the business of the assessee, was paid 10% commission on sales made to another parent company viz., SCSL which was not warranted because both the parent companies are equally responsible for the development of the assessee. The CIT was of the view that under the circumstances, payment of sales commission at 10% on sales made to SCSL and its affiliates was not reasonable and therefore not allowable. 3. The assessment order was considered erroneous by the CIT in so far as it relates to the above issue and as such prejudicial ....
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....ile applying TP provisions and making a TP adjustment. It was further submitted that this proposition is well supported by various judicial decisions. In this connection, reliance was placed on the decision of the Hyderabad Bench of the ITAT in the case of Social Media India Ltd (2013) (40 taxmann.com 37) wherein the ITAT held that the TPO could not have disallowed disallowed any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same nor on the reason that the assessee has not justified the benefit principle. ITAT took support from the decision of the Delhi High Court in the case of EKL Appliances (2012) (24 taxmann.com 199) (Delhi High Court). It was argued that the view taken by the CIT that the order of the AO is erroneous and prejudicial to the interest of Revenue for the reason that the rationale of the order of TPO for A.Y 2004-05 was not followed, cannot be sustained in the light of the legal position submitted above. * It was further submitted that the TPO in his order u/s 92CA(3) of the Act for A.Y 2003-04 recorded that the assessee produced evidence by way of debit notes and bank statement proving the remittance of sal....
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....cases of lack of enquiries that the jurisdiction under Sec. 263 of Income Tax Act, 1961 can be assumed. Reliance in this regard is placed on the following decisions: 1. CIT v. Anil Kumar Sharma - 335 ITR 83 (Delhi); 2. CIT v. Sunbeam Auto Ltd. 332 ITR 167 (Delhi); 3. CIT v. Gabriel India Ltd. 203 ITR 108 (Bom) In the present case before us the TPO and the Assessing Officer had applied their mind and allowed the entire commission while passing orders under sec. 92CA(3) and 143(3) respectively as claimed by the assessee. Hence we annul the order of CIT passed under sec.263. 11. In the result, appeal of the assessee is allowed. ITA No.196/Hyd/2008: A.Y - 2003-04 1. This is an appeal filed by the assessee against the order passed u/s 143(3) r.w.s. 263 of the Act. Since in ITA No.492/Hyd/2008 for the A.Y 2003-04, we have annuled the order of the CIT passed u/s 263, the appeal of the assessee against the order passed by the AO u/s 143(3) r.w.s. 263 of the Act is to be allowed in favour of the assessee. 2. In the result assessee's appeal is allowed. ITA No.783/Hyd/2008 - (A.Y 2003-04) Revenue's Appeal & ITA No.924/Hyd/2008: (A.Y. 2003-04) Assessee's appeal 1.....
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....ral Motors was a new customer during the F.Y. 2002-03 and the initial services were provided on a higher rate on trial basis. (i) The rates between Venture USA/Germany and General Motors should not be compared without making suitable adjustments towards the volume of business, as the working hours provided to A.E is 40 times more than the hours billed to Non AE (M/s. General Motors). Therefore, suitable adjustment should be made in the hourly rates to give effect to the volume of business generated. (ii) The provision similar to that of Transfer Pricing Regulations exist in the Customs regulations of India also to determine the Arm/s Length price of the goods imported into India. The courts on similar disputes on comparability of prices under customs law have held that the prices compared should take into account the volume differences between two transactions. (iii) Because there exist differences W.r.t. volume and the no. of hours worked by the Appellant for it's AEs and Non AEs:. the TPO ought to have followed the conditions provided in Rule 10B (2) and (3) of the Rules before resorting to comparison of the prices, and considered volume adjustment before deter....
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....he assessee would not be too high in case of the new client. However, keeping in view the substantial difference in the volume of transactions with M/s. General Motors vis-a-vis the AEs of the appellant, I feel that a deduction of 5% from the adjusted rate adopted by the TPO ($50.52) may be allowed while determining the ALP, considering the facts and circumstances of the case. Thus, the appropriate rate to be adopted for comparison under CUP method for computation of ALP of the services rendered to AEs would be ($50.52 (-) $ 2.52), or $ 48 per hour, against the rate charged by the appellant at $ 39 per hour from the AEs. 6.4. In view of the above, the adjustment on account of difference in rates under the TP provisions has to be worked out @ $9 per hour. The total difference worked out on this basis, adopting the conversion rate mentioned by the TPO at Rs. 48.23, would come to (16,708 hours x 9 x 48.23), or Rs. 72,52,442/-, against the difference adopted by the Assessing Officer at Rs. 92,83,125/- in the assessment order. This difference of Rs. 72,52,440/- will be added to the income disclosed by the appellant in place of the addition made by the Assessing Officer at Rs. 92,83,1....
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....er hand, the Department has come on appeal in ITA No.783/Hyd/2008 before us and filed the following grounds: "1. The CIT (A)-III Hyderabad erred in law in allowing the assessee's appeal. 2. The CIT (A) III Hyderabad ought to have appreciated the action of the AO in working of service charges @ $50.52 per hour instead of US $ 48 per hour adopted by the CIT (A) Hyderabad. 3. The CIT (A) ought to have appreciated the action of the AO that he has adopted service charges @ USD 50.52 per hour as determined by the TPO. 4. The CIT (A) ought to have appreciated the action of the TPO that he has determined the service charges as per CUP method as asked by the assessee and in strict principle, there is no adjustment is possible while applying the perfect comparison under CUP method". 12. The ld DR argued that the CIT (A) ought to have appreciated the action of the AO wherein service charges @ US$ 50.52 per hour was adopted as determined by the TPO. He also submitted that the TPO, as per CUP method as requested by the assessee, no adjustment is possible while applying the perfect comparison as adopted. 13. The ld Counsel for the assessee countered the statement of the DR as b....
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.... from the adjusted rates adopted by the TPO ($50.52 (-) @ 2.52) while determining the ALP, considered the facts and circumstances of the case. We confirm the order of the CIT (A). 18. In the result both the assessee and Departmental appeals in ITA No.924/Hyd/2008 and 783/Hyd/2008 are dismissed. ITA No.1136/Hyd/2013 - A.Y 2003-04 (Assessee's Appeal) 1. The original assessment U/s.143(3) was finalized by an order dated 31.03.2006 by the Assessing Officer basing on the order of the Transfer Pricing Officer (TPO). The assessee had entered into various international transactions (such as export of software engineering services, sales commission, man power resource support, reimbursement of CEO's remuneration) with AE which were examined in detail by TPO culminating into an addition to the export sales based on arm's length computation. The TPO based on the Comparable Uncontrollable Price (CUP) method for determination of the arm's length price adopted by the company, proposed an adjustment of Rs. 93 lakhs to the export income recognized by the company. The assessment was completed by the AO making the said addition to the total income declared by the company. ....
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....asons so furnished vide its letter dt.27.10.2010. The AO disposed the objections to notice U/s.148 by a letter dt. 1.11.2011. 6. The AO proceeded to re-assess the income U/s.143(3) r.w.s 147 accordingly. The AO referred the transactions to the TPO for arm's length price evaluation and also to special audit U/s.142(2A). Nature of addition Amount (Rs.in ALP method by company ALP By TPO TPO order (adjustment on account of Commission paid to AE Net of disallowance in original 143(3) and 263 (Rs.4.26 - Rs. 2.60) Export sales (Rs.8.62- 1.66 7.90 CUP CUP CUP TNMM AO Order Sec.10A adjustment to export sales under explanation 2(iv) under section 1OA Total 0.89 10.45 7. Based on the special auditor's report and Transfer Pricing Officer's order, the AO made a draft assessment order by proposing the above additions which are in dispute in this appeal. 8. Objections to Disput....
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....n his statement he categorically stated that these kind of irregularities were limited to Satyam Computers alone and one of the operations of the subsidiaries have been affected. In the light of the said letter written by Mr. Ramalingaraju and his subsequent statement before the department, AO proposed to reopen the assessment u/s 147. Para 4 of the reasons cited by the AO explains various facts derived from the statement of Mr. Ramalingaraju which according to him had a bearing of the assessment of the company. 15. The submissions of the ld Counsel for assessee is reproduced hereunder: "The following are the three major reasons coming out of the reasons recorded by the AO to reopen the assessment u/s 147. The facts relating to these reasons from the assessment record present the validity or otherwise of the reasons. Reason - I The assessee company is one of the group companies of Satyam Computers. The money originated from the family members had been transferred in circuitous and complex manner through front companies into investments and in creation of assets in the shape of large tracts of lands. The Ld Counsel's arguments are as follows: * The original assessm....
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....ting to Sat yam Computers. The said statement of Mr.Ramalingaraju excludes the affairs of any subsidiary compames from the said irregularities pointed out by him. Please refer to Para 2 of Letter by Mr.Ramalinga Raju (page 22 of paper book) stating that, " The gap in the Balance Sheet has arisen purely on account of inflated profits over a period of last several years (limited only to Satyam standalone, books of subsidiaries reflecting true performance). * The AO referred to circuitous and complex transactions by the front companies which resulted in creation of large tracts of land to the said companies. It may be appropriate to disclose at this point that the assessee company does not own land as on the date of financial statement for the current year and subsequent years as well, as evidenced by the financial statements. It has not purchased or sold land till now. * It is well settled law that as on the date of reopening, the AO is not required to prove with evidence the escapement of income. It is adequate if he demonstrates a relevant and live possible connection towards escapement of income. * None of the material narrated by the AO in the reasons given by him relate....
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....ed to the reasons for reopening furnished by the AO, on the similar lines explained above. These objections were repudiated by the AO. The reasoning given by the AO and the justification of the assessee are provided hereunder: * In his letter, AO mentioned: "3. It is objected that the statement made by Sri B.Ramalinga Raju, the erstwhile Chairman of Satyam Computer Services Ltd (your Parent Company) does not contribute in any way to subscribe to the reason to believe any income escaped assessment and the provisions of Sec. 148 r. w.s. 147 of the Income Tax Act 1961 cannot be invoked. However the above statement and the events followed thereafter assumes significance in as much as the erstwhile Chairman of SCSL admitted that the Company's balance sheet as at September, 30, 2008 carried an inflated cash and bank balances, non-existent accrued interest, an understated liability and an overstated debtors position. As the SCSL's accounts/Balance sheet referred by the then Chairman, includes the financial results of the subsidiaries and joint ventures of SCSL, the assessing officer had reason to believe that the above admission of financial irregularities and the financial ....
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....nt to the retuned income on identical lines had taken place at the time of original assessment proceedings and subsequently during the proceedings U/s.263. 19. The addition made by disallowing a portion of the deduction U/s.I0A arises on account of adjustment to the export turnover. This adjustment to the income was carried out for the first time. However, this adjustment is not one of the reasons for which the assessment was reopened U/s.147 as for the reasons furnished by the AO. Further, the addition pertained to a settled legal position of law where an adjustment to the export turnover should also' result in an adjustment to the total turnover. This addition has no bearing to the reason cited by the AO for reopening the assessment. The reduction in export turnover was made on account of legal interpretation of facts available in the accounts all along and in respect of which there was no failure to disclose on the part of the assessee. 20. Explanation 3 to Sec.147 was introduced by an amendment by Finance (2) Act. 2009 w.e.f. 1.4.1989. The introduction of the Explanation was to overcome to decisions of the Punjab and Haryana High Court and Rajasthan High Court which h....
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....s in the original assessment itself, and there being, no tangible material 'for the reopening of the assessment, the CIT(A) erred in confirming the order of the Assessing Officer. We, therefore, hold that the reopening of the jurisdiction under Section 147 is bad in law ad is to be quashed. 25. Applying the above to the assessment of the assessee the following facts emerge. The AO proceeded to assess the income by issuing a normal questionnaire seeking information from the assessee. He had not issued any specific letter seeking clarification on issues which prompted him to reopen the assessment. He issued show cause notice why the export turnover should not be reduced with respect to the expenditure in foreign currency. In the entire proceedings U/s.143(3) r.w.s 147, the AO had not asked any question or information connecting with the reason for reopening. Finally he completed the assessment U/s.143 r.w.s 147 by making the following additions: * Disallowance of claim U/s.10A on account of adjustment to export turnover despite the judicial rulings are in favor of the assessee * Addition on account of ALP - ITES sales to AE * Addition on account of ALP - commission pa....
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.... of appeal raised before us. 29. In the result assessee's appeal is allowed. ITA No.1137/Hyd/2013 (A.Y 2004-05) 1. The original assessment U/s.143(3) was finalized by an order dated 28.12.2006 by the Assessing Officer basing on the order of the Transfer Pricing Officer (TPO). The assessee had entered into various international transactions (such as export of software engineering services, sales commission, reimbursement of professional charges, reimbursement of CEO's remuneration) with AE which were examined in detail by TPO culminating into an addition to the export sales based on arm's length computation. The TPO based on the Comparable Uncontrollable Price (CUP) method for determination of the arm's length price adopted by the company, proposed an adjustment of Rs. 0.05 lakhs to the export income recognized by the company. In this year for the first time the TPO also made an adjustment to the commission paid to Venture Global LLC of Rs. 86 Lakhs. 2. Apart from the addition recommended by the TPO the AO also eliminated certain expenditure incurred in foreign currency for computation of exemption U/s.10A. The exemption claimed as per the return of Rs.....
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....draft assessment the company filed objection before the DRP by raising in summary the following grounds: 1. Section 147 - The reopening of assessment u/s 147 after completing the assessment u/s 143(3) does not satisfy the conditions laid down u/s 147. 2. The comparables adopted for determining the ALP of export sales is incorrect due to the functional differences between the Company and comparables. 3. Method adopted for determining the ALP for export sales by the TPO (TNMM) is incorrect. 4. ALP by the TPO for the commission payment without determining and identifying the comparables under CUP method is incorrect. 5. Adjustment to export sales to compute deduction U/s.10A is incorrect in the light of the settled position of the law. 9. The DRP had not appreciated the reasoning put forward by the company in support of the above said grounds and confirmed the draft assessment order of the AO. 10. The draft assessment order upon confirmation by the DRP culminated into final assessment order with the adjustments to the returned income as explained above. 11. Ground No.2 & 3 - before us is whether reopening U/s.147 is valid? i.e. the validity or otherwise of the ....
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....e., Venture Global (USA). Subsequently on appeal CIT (A) partly allowed the appeal and on commission payment the learned CIT (A) held that it is not an allowable expense as it is not incurred wholly and exclusively for the purpose of business in terms of section 37(1) of the Income tax Act, in view of the assessee's failure to establish the transaction in question i.e., the commission payment to Venture Global on the evidence of specific services rendered by Venture Global resulting benefit to the assessee. Further on several occasions, the assessee failed to establish the genuineness of the payment of sales commission to Venture Global before the department, even not produced the original agreements for verification. No evidence was produced to ascertain the nature of services rendered by the payee i.e., the Venture Global during the course of assessment and other proceedings. Thus, there is no necessity for the assessee company to make the payment to Venture Global and accordingly the arm's length price on the Commission payment is to be NIL as against the payment claimed by assessee of Rs. 3,66,00,492 and ALP determined by the TPO of Rs. 2,80,36,178 on the facts misle....
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....nexus with the financial transactions of the company. The statement by Mr.Ramalingaraju consisted details of certain transactions relating to Satyam Computers. The said statement of Mr.Ramalingaraju excludes the affairs of any subsidiary companies from the said irregularities pointed out by him. Please refer to Para 2 of Letter by Mr.Ramalinga Raju (page 22 of paper book of AY 2003-04) stating that, " The gap in the Balance Sheet has arisen purely on account of inflated profits over a period of last several years (limited only to Satvam standalone, books of subsidiaries reflecting true performance) 17. None of the material narrated by the AO in the reasons given by him related to the assessee company or had any bearing on the assessment. The assessee company is obliged to disclose truly and fully all the facts to enable completion of its assessments. The assessee cannot be obliged to disclose any information with respect to group companies which has no relevance to its assessments. 18. The transaction relating to payment of commission was examined by the TPO, AO and CIT(A) in the original assessment proceedings. In the absence of adequate documentation as considered by them t....
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.... * CIT vs. Jet Airways (I) Ltd (331 ITR 236) * Swarnandhara IJMII Integrated Township Development Company (ITA No.1803/Hyd/2012). * ACIT, Raipur vs. Major Deepak Mehta (24 Taxmann.com 147 Chattisgarh). * Ranbaxy Laboratories Ltd vs. CIT (12 Taxmann.com 74 Delhi) * CIT vs. Mohd. Juned Dadani (30 Taxmann.com I. Guj.) 24. We heard both parties. We rely on the decision of Ranjit Reddy vs. Dy. CIT, Hyderabad (2013) 144 ITD 361, wherein it has been held as follows: "One needs to give a schematic interpretation to the words 'reason to believe' failing which, section 147 would give arbitrary power to AO to reopen assessments on the basis of mere change of opinion, which cannot be per se reason to reopen. The AO has no power to review; he has the power to reassess. But reassessment has to be taxed on fulfilment of certain pre-conditions and if the concept of 'change of opinion' is removed, then, in the garb of reopening the assessment, review would take place. One must treat the concept of change of opinion as an inbuilt test to check abuse of power by the AO. Hence, the AO has power to reopen, provided there is 'tangible material' to come to the conclusion that there is....
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....and the expenditure debited in the case of assessee are manipulated to evade income tax. 4. On the strength of the above said reasoning, AO reopened assessment accordingly. It is pertinent to note that in the statement referred above Mr. Ramalinga Raju stated that accounts related to SCSL are not correct. He noted in his statement that the said practices were not carried out with regard to accounts of the subsidiary companies of SCSL. 5. AO referred the accounts of the assessee to special audit u/s 142(2A) in the light of the reasons recorded for reopening of the assessment. The special audit was considered appropriate by the AO as the assessee company being a joint venture of SCSL and having transactions with SCSL, the financial results of the assessee company may have been effected in view of its transactions with SCSL. 6. During the course of the assessment the AO had also made a reference u/s 92CA of the Act to the TPO with the approval of the CIT (Central) Hyderabad for determining the arm's length price of its international transaction. The TPO after examining the international transactions of the assessee company with AE made the following adjustments: (Rs.in crores....
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....or arriving at the arithmetic mean of the margins of comparable companies. He accordingly rejected the TP documentation filed. After having carried out analysis, he considered TNMM as the most appropriate method and accordingly applied the same. The PLI of 28.84% determined accordingly was applied as the percentage on operating cost (OP/OC) to ascertain the ALP adjustment. 10. AO had also recomputed the exemption u/s 10A while computing the income of the assessee company. AO had considered the following expenditure incurred in foreign currency as not entitled to be part of eligible export turnover for exemption thereof: Nature of the item Amount (Rs.) Travelling expenses 1,36,94,298 Expenditure incurred at overseas branch 11,45,16,705 Others 1,34,31,415 Total 14,16,42,418 11. Draft assessment order sent to the Department. Aggrieved against the draft assessment order u/s 143(3) r.w.s. 147 and 144C the assessee raised objection before the DRP by raising appropriate grounds. 12. The grounds raised against the reopening u/s 147 were rejected by the DRP. DRP considered where a return is processed u/s 143(1) there is no finding given by the AO and h....
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....e case of the assessee are manipulated to evade income tax. The Ld. Counsel submitted as follows:- 20. The statement of Mr. Ramalinga Raju prompted the AO's attention towards SCSL. AO must have presumably considered that the contents of the letter and the statement may not be adequate to reopen assessment of the assessee. Hence, proceeded to the next step and noted that he had gathered information that the income of the assessee company is also manipulated. However, he did not dwell on the nature of the information in his possession to assess whether the said information gave rise to a reason to believe. He also failed to seek clarification regarding the information that gathered during the assessment giving rise to his reason to believe. This gives to conclusion that the said information is either not present or it was not gathered at all. Finally the penultimate test of validity of the reason to reopen, resulting in addition or adjustment to the income reassessed also fails, because there was neither enquiry in this direction nor addition in the assessment completed u/s 143(3) r.w.s. 147. 21. The Ld Counsel further stated excepting the statement made by Assessing Officer....
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....s of the appellant Company. It is most important to appreciate at this juncture the routine enquiry carried out by the AO as if i is assessment under section 143(3). He did not refer to the "information gathered" which was recorded as the reason for any further enquiry during the assessment process. Neither the enquiry nor the additions made had any nexus or link with supposed reason for reopening of assessment. The reason to believe as recorded had not left any footsteps on the reassessment. The reassessment u/s 143(3) r.w.s 147 caused normal inquiry that would happen u/sI43(3) leaving undeniable evidence that the reassessment was a normal assessment in guise of reopening u/s 147. 25. The Ld Counsel contended that the reasons to believe must have a rational connection with or relevant bearing on the formation of the belief. The reason recorded must have a rational connection with the belief. The material in possession of the AO should have a direct nexus to the said belief. The material should be adequate enough to make the AO believe possible escapement of income. The test of rational connection fails where there is no material or the material gives rise only a suspicion not l....