TaxTMI 
TaxTMI 
2017 (5) TMI 421
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....alid and bad in law a.The learned ACIT erred in reopening the assessment under section 148 of the Act on the basis of the adjustment proposed in the order dated 29 October 2010 passed under section 92CA(3) of the Act. b.The learned ACIT erred In not appreciating that the aforesaid order dated 29 October 2010 passed under section 92CA(3) of the Act was without issue of notice under section 143(2) of the Act and was therefore invalid / bad in law and could not have been the basis for the reopening of an assessment. c.The learned ACIT erred in reopening the assessment for the reason that income chargeable to tax had escaped assessment within the meaning of section 147(C)(i) of the Act. d.The learned ACIT erred in not appreciating that for the assessment year under reference, no assessment had been made and therefore Explanation 2(c) (i) of section 147 of the Act was not applicable for holding that income chargeable to tax had escaped assessment. e.The learned ACIT erred in not appreciating that as the aforesaid order was passed before the expiry of the limitation fixed for framing the original assessment, no fresh material was available which would justify recourse being tak....
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....e appellant. c.The learned ACIT/DRP erred in holding that the provisions of section 194J of the Act were applicable to the reimbursements made to HUL. d. The learned ACIT/DRP erred in not appreciating that: i. the expenditure on the various trade promotion schemes run by the appellant to promote the sale of its products was entirely controlled by the appellant; ii. the above trade promotion schemes were merely administered through the existing selling and distribution network of HUL; and iii. the amounts paid to HUL were towards reimbursement of the trade spends incurred by HUL on behalf of the appellant and therefore the question of deduction of tax at source and consequent disallowance under section 40(a)(ia) of the Act did not arise. e. The learned ACIT / DRP erred in not considering the submissions of the appellant / documentary evidence filed by the appellant in the correct perspective. 4. Disallowance of management cost a. The learned ACIT erred in disallowing management cost of Rs. 1,42,56,511/- reimbursed to HUL. The learned DRP erred in confirming the same. b.The learned ACIT / DRP erred in holding that the payment to HUL was nothing but payment for rende....
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.... income declared in the return of income filed had also been paid by HUL; ii. In terms of the amendment to section 40(a)(ia) of the Act made by the Finance Act, 2012, it would be deemed that tax on the aforesaid reimbursements made/ discount given to HUL had been deducted and paid by the appellant for the purpose of allowing deduction under the said section; iii. the amendment in section 40( a)(ia) of the Act made by the Finance Act, 2012 was clarificatory in nature and therefore has retrospective effect from 1 April 2005, being the date on which the said section was inserted by the Finance (No.2) Act, 2004. c. Without prejudice to the above, the learned ACIT erred in not restricting the disallowance, if any, to the amounts payable to HUL as on 31 March 2007. The learned DRP erred in not giving any directions in respect of the same. d. The learned ACIT / DRP erred in not appreciating that the provisions of section 40(a)(ia) of the Act were applicable only to the amounts of expenditure which were payable as on 31 March of the previous year and could not have been invoked to disallow expenditure which had actually been paid to HUL during the previous year. 7. Incorrect reje....
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....ings to be initiated in this regard. 10. Each one of the above grounds of appeal is without prejudice to the other. 11. The appellant reserves the right to amend, alter or add to any of the above grounds of appeal. 3. The Ld. Authorised Representative for the assessee at the outset pointed out that the assessee has raised the preliminary issue against the reopening of assessment under section 147/148 of the Act and pointed out that the said issue is covered by the earlier orders of the Tribunal in the case of Maximize Learning Private Limited Vs. ACIT in ITA No.2234/PUN/2012 relating to assessment year 2007-08 order dated 02-02-2015 and DCIT Vs. SAS Research & Development (India) Pvt. Ltd. in ITA Nos.810/PUN/2013, ITA No.1850/PUN/2013, ITA Nos.1927/PUN/2013, CO. Nos. 03 & 04/PUN/2015 relating to assessment year 2004-05 to 2006-07 order dated 16-09-2016. 4. Briefly in the facts of the case the assessee had filed the return of income on 31-10-2007 declaring total income of Rs. 30,01,43,006/-. The said return of income was processed under section 143(1) of the Act. Reference under section 92CA of the Act was made to the Transfer Pricing Officer on 26-10-2009. The Transfer Prici....
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....d escaped assessment was based on an invalid Transfer Pricing order and hence there was no reason for reopening the assessment on the basis of the said order of Transfer Pricing Officer. 6. The plea of the assessee was considered by the Assessing Officer and in reply a letter was issued on 13-07-2011. It was pointed out by the Assessing Officer that the Joint Commissioner of Income Tax, Transfer Pricing-1, Pune had passed the order under section 92CA(3) of the Income Tax Act proposing addition of Rs. 12.17 crores on account of adjustment of Arms Length Price for the instant assessment year. The Assessing Officer further observed "the case was not selected for scrutiny and no notice under section 143(2) was issued. In view of the findings of Transfer Pricing Officer, it was reopened in the case for assessment year 2007-08 by issue of notice under section 148." The Assessing Officer thus rejected the objections of the assessee against issue of notice under section 148 of the Act being not tenable and held that the reopening was as per law. The said communication is placed at pages 100 to 105 of the paper book. The assessee thereafter participated in the assessment proceedings, howev....
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....he assessee filed the objections to the draft assessment order proposed, the proceedings were dropped since the notice under section 143(2) was issued beyond the time limit. However, in the case of the assessee, no such notice under section 143(2) was issued. The Assessing Officer in the letter dated 13- 07-2011 has admitted that the case was not selected for scrutiny and no notice under section 143(2) was issued, the said letter is placed at pages 104 and 105 of the paper book. Thereafter in both the cases notice under section 148 of the Act was issued by the Assessing Officer. In view of the reasons recorded for reopening the assessment, on the basis of the order of the Transfer Pricing Officer under section 92CA(3) of the Act, the said reasons recorded in both the cases are nearly identical and the Assessing Officer has reason to believe that the income of Rs. 12.17 crores had escaped assessment on account of adjustment to International Transactions, which adjustments was worked out by the Transfer Pricing Officer vide order passed under section 92CA(3) of the Act on 29-10-2010. "10. The crux of the controversy revolves around the provisions of section 147/148 of the Act which ....
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....) of the Act which is nonest 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 touchupon 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 expre....
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....rnational transaction 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 subsection (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 ....
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....ssment proceedings, 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....
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....is 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 t....
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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 pr....
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....material available with him, passed an order dated 29.10.2010 determining the arm's length price in accordance with sub-section (3) of section 92CA of the Act. 25. In the background of the above facts, it needs to be established as to whether on 14.09.2009 when the Assessing Officer made a reference to the TPO u/s 92CA(1) of the Act, was there an assessment proceedings u/s 143 of the Act pending for the year under consideration. In the present case, we are dealing with assessment 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 r....
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....it was an invalid reference. Consequently, the subsequent order passed by the TPO on 29.10.2010 (supra) determining the adjustment of Rs. 2,49,48,811/- to the international transaction is a nullity in law and void ab initio." 11. Another aspect noted by the Tribunal was whether in the above said circumstances the order of the TPO could be valid material for the Assessing Officer to entertain a belief that certain income chargeable to tax has escaped assessment within the meaning of section 147 of the Act. It was held by the Tribunal that the reasons recorded by the Assessing Officer in the present case do not meet the requirement of section 147 of the Act and therefore the Assessing Officer had no jurisdiction to issue notice under section 148 of the Act dated 14.01.2011 and as a consequence, the subsequent assessment order passed under section 143(3) r.w.s. 147 and 144C(3) of the Act was liable to be quashed. The relevant observations of the Tribunal (supra) are in paras 28 to 35, which are as under :- "28. The next aspect is as to whether, in the above circumstances, the order of the TPO dated 29.10.2010 (supra) can be a valid material for the Assessing Officer to entertain a ....
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....be made to the stated values of the international transaction. Therefore, the aforesaid material provided a good ground for the Assessing officer to formulate a belief that certain income chargeable to tax had escaped assessment. 31. At the outset, we may notice that the validity of the notice reopening the assessment u/s 148 of the Act has to be determined on the basis of the reasons which are disclosed to the assessee. Those reasons constitute the foundation of the action initiated by the Assessing Officer of reopening the assessment. The averments made by the Ld. CIT-DR regarding the compulsory scrutiny of returns which involved international transactions and/or that the Form No.3CEB was not filed with the Assessing Officer, are reasons which are not finding a place in the reasons recorded by the Assessing Officer for re-assessment. The reasons recorded by the Assessing Officer for re-assessment, have already been reproduced by us in the earlier part of this order. It's a trite law that the reasons recorded by the Assessing Officer are alone to be examined so as to test their validity. In this context, a reference can be made to the judgement of the Hon'ble Delhi High Court in....
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.... of the Hon'ble Supreme Court in the case of Pooran Mal (supra). It is quite well-settled that any illegality or irregularity in obtaining material or evidence would not preclude the Revenue authorities from utilizing the same in assessment of income unless the genuineness and correctness of the material or evidence is in doubt. So however, in the present case, we are not dealing with the power of the Assessing Officer to compute income of the assessee arising from an international transaction based on the arm's length price determined by the TPO. Indeed, as we had seen earlier the computation of total income from an international transaction has to be done by the Assessing Officer under sub-section (4) of section 92C read with sub-section (4) of section 92CA of the Act having regard to the arm's length price determined by the TPO. There is no dispute on the said aspect. In the present case, the point made out by the assessee is that a nonest and void ab initio order passed by the TPO on 29.10.2010 determining the arm's length price u/s 92CA(3) of the Act cannot form a basis to formulate a belief that certain income chargeable to tax has escaped assessment within the me....
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....y, in the period prior to assessment year 2002-03, the un-amended provisions of section 92 of the Act did not provide for an order by the TPO determining arm's length price. The assessee attacked the initiation of proceedings u/s 147/148 of the Act for a period prior to assessment year 2002-03 contending that the order of the TPO passed under Chapter X subsequent to the amendment made with effect from 01.04.2002 in respect of a subsequent assessment year was irrelevant. In other words, assessee canvassed that the order of the TPO in respect of a subsequent assessment year could not be a ground to reopen the assessment of a year which was prior to the amendment of section 92 of the Act with effect from 01.04.2002. The Hon'ble High Court disagreed with the assessee's defense and upheld the action of the Assessing Officer in taking into account the subsequent order of the TPO for forming a belief that certain income liable to tax had escaped assessment even in relation to an assessment year prior to the insertion of 92CA of the Act with effect from 01.04.2002. As per the Hon'ble High Court, the order of the TPO could certainly have nexus for reaching a conclusion that income has b....