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TMI Blog2012 (12) TMI 558X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment, since according to it, reasons recorded for reopening did not satisfy the conditions specified in Section 147 of Income-tax Act, 1961 (in short 'the Act'). 2. Short facts apropos are that assessee, engaged in export of unbranded readymade garments, had filed its return for the impugned assessment year on 20.10.2006 admitting an income of Rs. 80,35,860/-. The said return was processed under Section 143(1) of the Act on 31.7.2007. Thereafter, a notice dated 22.4.2008 under Section 148 of the Act was issued to it by the Assessing Officer. Pursuant to such notice, assessee filed a letter stating that original return filed on 20.10.2006 could be treated as one in response to the notice under Section 148 of the Act. Since assessee was having international transactions, a reference was made by the A.O. under Section 92CA of the Act to the TPO on 5.6.2009. Assessing Officer required the TPO to determine the arm's length price in respect of the transactions reported by the assessee in Form No.3CEB filed by it along with its return. TPO required the assessee to justify the values of international transactions entered by it. At this juncture, it is to be noted that assessee was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntities, namely, one M/s Kariwala Industries Ltd. and one M/s Meenakshi (India) Ltd. The margin of operating income to total cost in the case of M/s Kariwala Industries Ltd. came to 13.06%, whereas, in the case of Meenakshi (India) Ltd. it came to 9.52%. The average of these two worked out to 11.29%. As per the TPO, such average was much higher than assessee's PLI 3.91%. Therefore, she worked out the ALP of the international transactions considering 11.29% as the margin on cost (PLI) and arrived at a figure of Rs. 1,65,73,606/- for an upward adjustment. 4. When the above proposal was put to the assessee, its reply was that its transactions with non-AEs were uncontrolled and comparable transactions, within the meaning of Rule 10B(1)(e) of Income-tax Rules, 1962 and therefore, no adjustments were called for by making a comparison with an external party. However, TPO did not accept this contention. According to her, though in assessee's case, AEs and non- AEs transactions were comparable, TNMM could not be adopted, since for determination of net margin, it was required to consider both sales and corresponding costs. As per the TPO, assessee though was able to identify the direct cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... akshi (India) Ltd. was 9.52%. Since this was beyond the 5% safe harbour limit, DRP required A.O. to re-work the upward adjustment by applying 9.52% as the PLI. In effect DRP restricted the upward revision to 1,25,85,937/-. 7. Now before us, learned A.R. at the outset assailed the re-opening done for the impugned assessment year. According to him, even though the original return was processed under Section 143(1) of the Act, for application of Section 147, there had to be a reason to believe that income chargeable to tax has escaped assessment. According to him, no reason for resorting to an opening was given at all, but for stating that certain income had escaped assessment. According to him, existence of a belief based on a reason was required for reopening even where original return was only subject to a processing under Section 143(1) of the Act. Unless and until A.O. could show that a reason existed, the reopening was invalid. Sufficiency of reason cannot be questioned but relevancy can always be questioned. Thus, according to him, the reopening was invalid and consequently, the re-assessment had to be quashed. In any case, according to him, assessee's internal TNMM study was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e re-assessment proceedings were initiated only for a reason that international transactions exceeded Rs. 15 Crores and therefore, the case was to be compulsorily scrutinized. Now we have to see whether this satisfies the requirement of Section 147 of the Act. Judgments of Hon'ble Apex Court in the case of Rajesh Jhaveri Stock Brokers (P) Ltd. (supra) and later in the case of CIT v. Kelvinator of India Ltd. (320 ITR 561) are very relevant here. After making a deep study of Section 143(1) of the Act as it stood before and after the amendment which came into effect from 1st June, 1999, and also Sections 147 prior to and after its exclusion by Direct Tax Laws (Amendment) Act, 1987, it was held as under by Hon'ble Apex Court in paras 17 and 18 of its order in the case of Rajesh Jhaveri Stock Brokers (P) Ltd. (supra):- "17. The scope and effect of s. 147 as substituted with effect from 1st April, 1989, as also ss. 148 to 152 are substantially different from the provisions as they stood prior to such substitution. Under the old provisions of s. 147, separate cls. (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terpretation to the words "reason to believe" failing which, we are afraid, s. 147 would give arbitrary powers to the A.O. to reopen assessments on the basis of "mere change of opinion", which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. The A.O. has no power to review; he has the power to reassess. But reassessment has to be based on fulfillment of certain precondition and if the concept of "change of opinion" is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of "change of opinion" as an in-built test to check abuse of power by the A.O. Hence, after 1st April, 1989, A.O. 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. Our view gets support from the changes made to s. 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words "reason to believe" but also inserted the word "opin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... damental flaw, going to the roots and vitiating the re-assessment process. 10. Coming to the merits, case of the assessee is that its internal comparable had to be considered since it was having transaction with non-AEs also. Admittedly, assessee was a 100% exporter and all its customers were abroad. Assessee claims that the indirect expenses, if it was distributed in the ratio of the turnover, then a TNMM analysis based on such a comparison of internal results, cannot be brushed aside. Only reason why the A.O. and the TPO had rejected the TNMM was that it was based on internal segregation of AE and non-AE transactions and cost distribution for indirect cost was not correctly done. Work out produced by the assessee for arriving at the PLI for its transactions with AEs and non-AEs, were as under:- Particulars AE Rs. Non AE Rs. Sales 19,95,49,239 2,73,56,909 Export Incentive 63,73,920 8,73,824 Gross Income 20,59,23,159 2,82,30,733 Less: Direct Expenses 19,34,62,415 2,63,79,116 Gross Profit 1,24,60,744 18,51,617 Less: Indirect Expenses 47,93,359 6,57,138 Operating Profit 76,67,385 11,94,479 Gross Profit ratio 6.1% 6.6% OP/OE ratio 3.9% 4.4% Both the TPO as well as DRP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontended that the addition has been made,inter alia, on the basis of similar facts and circumstances obtaining in the preceding assessment year 2006-07 wherein the ITAT vide their order dated 29.01.2011 concluded on this issue as under:- "17. In the light of the discussions made above, we therefore,hold that the assessee was justified in undertaking internal Bench making analysis on stand alone basis by placing on record working of operating profit margin from international transactions with AEs and transactions with unrelated parties undertaken in similar functional and economic scenario, and the same should be the basis for determination of arm's length price in respect of international transactions undertaken with the associated enterprise. In the light of the facts of the present case as discussed above, we therefore, hold that the Transfer Pricing Officer had no mandate to have recourse to external comparables when, in the present case, internal comparables were available, which could be applied for determining the arm's length price of international transactions with AEs. We, therefore, direct the Assessing Officer/Transfer Pricing Officer to determine arm's length price of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stand alone basis by placing on record working of operating profit margin from international transactions with AEs and transactions with unrelated parties undertaken in similar functional and economic scenario, and the same should be the basis for determination of arm's length price in respect of international transactions undertaken with the associated enterprise. It was further concluded that the TPO had no mandate to have recourse to external comparables when, in the present case, internal comparables were available, which could be applied for determining the arm's length price of international transactions with AEs. Accordingly, the ITAT directed the Assessing Officer/Transfer Pricing Officer to determine arm's length price of international transactions with AEs by making internal comparison of the net margin earned by the assessee from the international transactions with associated enterprises and the profit earned by the assessee from the international transactions with unrelated parties. For this purpose, the ITAT restored the matter back to the file of the AO/TPO for fresh adjudication and for the purpose of determining the arm's length price in respect of the internationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall be taken to be the arithmetical mean of such prices, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean." 14. No doubt, once the external comparable taken by TPO is rejected, only one price remains for comparison, here. Question then is whether the proviso can be applied at all. The proviso requires that more than one price is determined. In other words, unless more than one price is determined, safe harbour rule of +5% cannot be applied. This is the plain meaning of the above proviso. Proviso does not give any room for interpretation by intendment. Here, no doubt, assessee by applying TNM method based on internal comparable, had come to a PLI of 4.4%. As against this, the TPO adopting an external comparable, had come to a PLI of 5.38%, as it is clear from her rectification order dated 18.4.2012. We have already held that assessee was justified in following internal TNM method for justifying the value of its international transaction. Since assessee's claim that TNM method based on internal comparable has to be adopted, is accepted, there is only one price that can be determ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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