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TaxTMI 
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2015 (7) TMI 470
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....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 to the interest of Revenue. He rejected the con....
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.... 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 sales commission at 10% of value of engineering services. The ....
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....come 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. This appeal is preferred by the Revenue against the order of the CIT (A)-III Hyderabad....
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....igher 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 determining the arm's length nature of the transaction of rendering IT Engineering services to the Appella....
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....ce 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. 92,83,125/-. 'The grounds taken by the appellant in this regard are, accordingly, partly allowed". 8. Aggrieved,....
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....)-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 being that when CUP method is adopted as an appropriate method, no adjustment can be made to the price taken as comparable. The ld Co....
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....e. 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. 2. Aggrieved by the assessment the assessee filed an appeal before the CIT(A) where the rate per hour fixed by the TPO (for determining ALP unde....
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....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 Dispute Resolution Panel were raised by the assessee. 9. Aggrieved by the proposed draft assessment, the company filed before the DRP by raising in summary the following grounds: 1. Sec.l47 - The reopening of assessment U/s.147 after compl....
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....atement 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 assessment was completed U/s.143(3) by incorporating adjustments to the international transactions as per the TPO's order. The assessee company had neither acquired nor sold any land since its inception. All the transactions with the parent company SCSL are examined in th....
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....ce 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 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 ....
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....he 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 seam at Satyam Computers, your parent company, had ramification on the financials of your company as well, as your company is joint venture, controlled and managed by the Sat yam Management headed by Sri B.Ramalinga Raju in India given the fact that the other JV partner is located outside....
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....ut 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 held that the AO after issue of notice U/s.148 has to restrict his re-assessment (addition) only to the limited extent of income which may have escaped based on the reasons for which the notice was issued. This barred the AO from making any addition other than addition arising on account of reason for reopening the assessment. 21.....
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....e 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 paid to AE None of these additions figure in the reasons for reopening. These are other additions which arose during course of assessment. From the above two irrefutable conclusions emerge: * The reason for reopening was based on vague information and a mere reason to suspect, only. * Accordingly, neither enquiry nor addition on account, of reason t....
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....e 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. 1.9 Crores had been reduced to Rs. 0.24 Crores based on the adjustment to the export turnover. This resulted in a net adjustment of Rs.l.66 Crores on account of Sec. 1 OA to the returned income. The assessment was completed by making the said addition to the total income declared by the company by the AO. 3. Aggrieved by the assessment the assessee filed an appeal before the CIT. ....
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....les 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 reopening of the assessment is being objected broadly on two grounds. i) The reason for reopening is vague and based on absence of any nexus to any of the operations of the appellant. ii) The assessment is finalized without resulting in any addition on account of reason for reopening. 12. The Assessing Officer reopened the assessment under section 147 beyond the period of four years. Sec.147 permits the reopening/reassessment of assessment finalized under section 143(3)....
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....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 misled by the assessee." The Ld Counsel submitted as follows: 15. The reasons given by the Assessing Officer stems out from the original assessment order, CIT(A) order and TPO's order. There is no mention of any fresh fact, evidence or information leading the AO to believe possible escapement of income. It is pre-condition of Sec.147 that an assessment completed U/s.143(3) cannot be reopened unless there is a failure to disclose fully and truly material facts necessary for assessment. A....
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....t 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 they did disallow a portion of the commission paid. The statement of the Chairman of Sat yam Computer Services Ltd or any of the transactions narrated by him have not referred to the transaction of commission. 19. The reason elucidated by the AO should lead a rational person to the belief of possible escapement of income. In other words the reason should direct, an enquiry as to quantification of income that is found to have escaped assessment. The reason and the belief from the above cited paragraph s....
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....o 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 escapement of income from assessment. Reasons must have a live link with the formation of the belief". 25. Further, para 32 at page 483 in the case of S. Ranjit Reddy (Supra), reads as follows: "Same view was taken by the Third Member Mumbai Bench in the case of Telco Dadajee Dhackajee Ltd vs. Dy. CIT (ITA No.4613/Mum/2005 dated 12th May, 2010). Further same view was taken by Delhi High Court in the case of CIT vs. Orient Crafts Ltd (2013) 29 taxmann.com 392 and also by Gujarat High Court in the cazse of Inductotherm Indi....
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....corded 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) Nature of International transaction Amount as per financial statements Arm's Length price Adjustment Export of software Engineering services 1.33 1.5 0.17 Sales commission 3.35 Nil 3.35 Total adjustment 3.52 7. Based on the above adjustment to the international transactions as recommended by the TPO, AO finalized the assessment after considering the Special Audit Report and Transfer Pricing Officer order by making the following adjustments: ALP Adjustment &n....
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....ereof: 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 hence reopening is justified. Despite the AO or TPO not having identified either bogus payments or inflated expenditure, the DRP erroneously observed that it is a well known fact that in this group the expenditure was inflated, bogus payments were made etc. For these reasons, they held the reopening u/s 147 as valid. 13. Also objected to on merits against the Arm's Length Price Adjustment. 14. Before us, the assessee raised additional grounds which are as follows: "(i) On the facts and in circumstances of the case, the ld AO erred in law and facts in reopening the case u/s 147 without a valid reason to believe the income escaped assessmen....
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....on 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, there was no material available with any agency within two months after the statement. (The assessee's case is reopened within 3 months from the date of confession by Mr RamalingaRaju.). The trial of the offences committed by Mr Ramanlinga Raju, even after five years has not reached a finality nor the charges filed against SCSL had indicated any irregularities in subsidiaries of SCSL. In the above circumstances, what is stated in the letter and statement do not give rise rational reason to reopen the appellant's case. 22. The Ld. Counsel submitted the notice under Sec.148 was issued based on vague reasons and there was no tangible or definite information which coul....
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..... 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 leading to belief. The material should not be vague or guess or gossip or rumor. The reason cited by the AO cannot be pretence to reopen the assessment. It cannot be purely subjective satisfaction of the AO. It should be capable to being tested for connection and rationality to cause belief. 26. The ld Counsel also relied on The ld Counsel for the assessee relied on the following judicial precedents: * 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 Dad....