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2015 (7) TMI 470 - ITAT HYDERABAD

2015 (7) TMI 470 - ITAT HYDERABAD - TMI - Revision u/s 263 - TPO allowed commission while passing orders under sec. 92CA(3) - Held that:- CIT erred in holding that in the absence of section 92CA(4) during the relevant period, it is not binding on the AO to follow the order of TPO. The order of CIT is contrary to the CBDT instruction No.3 of 2003 wherein it is clarified that the AO has to compute the total income of the assessee having regard to the arms length price so determined by TPO.

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ent 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. - Decided in favour of assessee.

Transfer pricing adjustment - Disallowance by the AO on the basis of arm’s length price of I.T. Engineering services worked out by the TPO i.e. Add. CIT, Transfer Pricing, Hyderabad vide his order u/s .....

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he adjusted rate adopted by the TPO while determining the ALP by stating that no assessee will charge a rate which is at great variance with the normal market rate of the services provided considering the fact that it was a new client who whom the assessee will try to get more business in future. Hence the CIT observed that despite less transactions, the rates charged by the assessee in case of new client. Therefore, the CIT had rightly directed for an adjustment of account difference in the rat .....

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t adjustment of deduction at 5% 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). - Decided against assessee and revenue.

Reopening of assessment - Addition made by disallowing a portion of the deduction U/s.I0A arises on account of adjustment to the export turnover - Held that:- The AO proceeded to assess the income by issuing a normal questionnaire seeking .....

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case in reopening the assessment u/s 147 of the I.T. Act, 1961 after having assessed and re-assessed u/s 143(3) and section 263. Since we have decided the jurisdictional grounds in favour of the assessee, we are not adjudicating on the other grounds of appeal raised before us. - Decided in favour of assessee.

Validity of reopening U/s.147 - Assessing Officer reopened the assessment under section 147 beyond the period of four years - Held that:- There is no fresh fact or ‘tangible mat .....

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rvices, Hyderabad (Assessee herein). - Decided in favour of assessee.

- ITA No.492/Hyd/2008 & ITA No.196/Hyd/2011,ITA No.783/Hyd/2008,ITA No.924/Hyd/2008,1136/Hyd/2013 & 1137/Hyd/2013,ITA No.1904/Hyd/2011 - Dated:- 1-7-2015 - Shri P.M. Jagtap & Smt.Asha Vijayaraghavan, JJ. For the Petitioner : Shri C.S. Subramanyam & Shri V. Siva Kumar For the Respondent : Smt. G. Aparna Rao, DR ORDER Per Smt. Asha Vijayaraghavan, J.M. These are the appeals preferred by the assessee and the Rev .....

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commission. Out of this ₹ 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 .....

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tes 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 contention of the assessee that the commission was payable as per the agreement entered into with Venture Global stating that such an agreement is not the final document to decide whether the expenditure is genuine. He also stated that the nature of services rendered by Ventur .....

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ure etc., which is not the case when services rendered to a partner of the joint venture who is well aware of the product. 5. The CIT justified the initiation of proceedings u/s 263 stating that prior to amendment of section 92CA(4) w.e.f. 1.6.2007, the TPO s order was not binding on the AO and thus the AO was empowered to alter the TPO s order. The CIT held that since the AO did not exercise his power while passing order u/s 143(3) of the Act, the said order was erroneous and prejudicial to the .....

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d on sales made to SCSL and its affiliates. He also directed the AO to invoke the provisions of section 92C(3) and pass the order accordingly. 7. On appeal against the order u/s 263, the ld Counsel for the assessee submitted as follows: • As regards the direction of the CIT, for following TPO s order for subsequent A.Y viz., A.Y 2004-05 it was submitted that the TPO disallowed commission paid on sales made to SCSL and its affiliates for that year on grounds of commercial expediency and this .....

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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 .....

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epted under CUP method. In the light of this position, the acceptance of the TPO s order by the AO cannot be held to be prejudicial to revenue. In this connection reliance was placed on the decision of ITAT A Bench Hyderabad in ITA Nos.549/H/2014 and 595/H/2015 dated 13.10.2014 in the case of M/s. OWENS Corning Industries (India) Pvt. Ltd Hyderabad wherein it has been held that once RBI approval of royalty rate was obtained, the payment was to be held as at Arm s Length. • Assessee, therefo .....

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isdictional bench of the ITAT. Again the method of commercial expediency adopted by the TPO for A.Y 2004-05 which was recommended by the CIT for consideration by the AO has been struck down as totally unacceptable by the appellate authorities including the jurisdictional bench of ITAT. 8. The ld DR relied on the order of the AO. 9. We have heard both the parties. We are of the opinion that the CIT erred in holding that in the absence of section 92CA(4) during the relevant period, it is not bindi .....

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uiries made by the Assessing Officer are inadequate, the jurisdiction under Sec. 263 of Income Tax Act, 1961 cannot be assumed as it was only in the 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 a .....

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e 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, dated 20.02.2008 passed for A.Y 2003- 04 and the main issue involved in the appeal is re .....

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djusted rate regarding non AE after providing 10% reduction for sales commission payable on the sales made to non-AEs @ $50.52 per hour. The assessee explained to the TPO that the General Motors (GM) was a new customer during the relevant year and the volume of services provided by the assessee to GM was quite less, on account of which higher rates were charged. However, the TPO observed that the assessee itself had asked for adoption of CUP method and there was no adjustment possible while appl .....

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ded the above additions in the business profits on account of which the income has been finally assessed at ₹ 43,17,240. 4. Aggrieved, assessee preferred appeal before the CIT (A). 5. In Ground No.2, assessee disputed the AO s finding that on site services billed to Venture USA and Venture Germany were not at arm s length. Ground Nos. 3 to 5 and ground No.7 are again extension and elaboration of the main ground taken by the assessee against the adjustment made by the TPO/AO by comparison o .....

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, 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 t .....

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to the Appellant's AE's, namely Venture USA and Venture Germany. 7. The ld CIT (A) Held as follows: 6.2 On careful consideration of the submissions of the appellant, I find that there is some force in the argument of appellant that the AO should have made suitable adjustments before making the comparison of rates charged by the appellant for similar services to its AEs and non AEs, looking to the difference in volume of transactions and the fact of General Motors being a new client for t .....

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ered as internal CUP by the TPO for the purpose of comparison in this case. In view of this, looking to the functional similarity, I uphold the adoption of services given to M/s. General Motors as comparable with the services provided to the AEs by the TPO/AO, on the facts of the case. 6.3 The next important issue requiring consideration is the adjustment/deduction in rates required to be given on account of high difference in volume of transactions, as contended by the Ld ARs of the appellant d .....

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cumstances, no assessee will charge a rate which is at great variance with the normal market rate of the services provided, considering the fact that it was a new client with whom the assessee will try to get more business in future. Hence, despite low volume of transactions, the rates charged by the 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 appellan .....

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tes 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 ₹ 48.23, would come to (16,708 hours x 9 x 48.23), or ₹ 72,52,442/-, against the difference adopted by the Assessing Officer at ₹ 92,83,125/- in the assessment order. This difference of ₹ 72,52,440/- will be added to the income disclosed by the appellant in place of the addition made by the Assessing Officer at .....

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ment on a scientific basis instead of arbitrarily allowing 5% adjustment. 3. The ld CIT (A) has compared the prices charged to non-AE customer M/s General Motors for 424 hours as against 16,208 hours provided to Associated Enterprises (Venture Group) and adjustment of 5% does not commensurate with the difference in volume of hours worked. 4. The ld CIT (A) ought to have followed the conditions provided in Rule 10B(2) and (3) of Income Tax Act before resorting comparison of the prices. 5. The ld .....

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e ld Counsel for the assessee submitted that the CIT (A) failed to grant necessary adjustment for the price difference on a scientific basis and proceeded on an adhoc basis by granting a deduction @ 5% which is not in accordance with Rule 10B. The ld Counsel further submitted that the assessee worked for nearly 40 times more with AE when compared to non- AE. It was further submitted in addition General Motors is a new customer taken on trial basis and hence the company has quoted higher price as .....

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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 .....

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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 Counsel for the assessee stated that this proposition is in violation to Rule 10B(3)(ii) which mandates that the reasonable accurate adjustment need to be made to eliminate effects of difference. Otherwise, the non-AE transactions, as such, cannot be made as comparable to AE transactions. 14. The ld Cou .....

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many and General Motors should not be compared without making suitable adjustment towards the volume of business as the working hours provided to AE is 40 times more than the hours billed to M/s General Motors. However, we are in confirmity with the order of the CIT (A) wherein he has applied his mind and discussed elaborately at Para Nos. 6.3 and 6.4. The CIT (A) has justified the deduction of 5% from the adjusted rate adopted by the TPO while determining the ALP by stating that no assessee wil .....

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table adjustment have to be made to bring the prices to a comparable level has been satisfied by the CIT (A) by giving a reduction of 5%. The CIT (A) was of the opinion that the reduction of 5% is sufficient with respect to the facts of the case, we also confirm. 17. The ground of the Department is that in Ground No.4, once CUP method is adopted, no adjustment is possible is incorrect and the CIT (A) has given sufficient adjustment of deduction at 5% from the adjusted rates adopted by the TPO ($ .....

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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 ₹ 93 lakhs to the export .....

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nsequent to the CIT(A) order the net enhancement to the income was determined at ₹ 57 lakhs as against ₹ 93 lakhs referred above. Aggrieved by the said order of CIT(A) the revenue and the company are in cross appeals before the ITAT which are pending disposal. 3. Subsequently the assessment for AY 2003-04 was revised by the CIT U/s.263 of the IT Act. The CIT found that for the AY 2004-05, the AO disallowed portion of the sales commission paid by the assessee to its AE. Based on the i .....

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de to Satyam Computer Services Ltd. and its associates. The entire sales commission paid on the sales received from SCSL was disallowed. Against the revised assessment the assessee filed appeal before CIT(A). 4. The CIT (A) dismissed the appeal. Assessee filed appeal against the CIT s order u/s 263 as well as the order of the CIT (A) on the revised assessment. The 263 order was annulled by our order in ITA No.492 and the appeal against giving effect to order passed by the AO u/s 143(3) r.w.s. 26 .....

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bjected to the said re-opening, based on the reasons 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 .....

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oposed 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 completing the assessment U/s.l43(3) and U/s.l43(3) r.w.s 263 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) .....

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final assessment order with the adjustments to the returned income as explained above. 12. Ground Nos.2 & 3 before us is whether reopening u/s 147 is valid or not. 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 assessee. ii) The assessment is finalized without resulting in any addition on account of reason for reopening. 13. The AO re .....

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ecessary for assessment. 14. On 7.1.2009, Chairman, Satyam Computer Services Ltd had written a letter to the Board of Directors of Satyam Computers wherein he elaborately explained various transactions of Satyam Computer Services Ltd which resulted in the financial statements being incorrect. In 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 l .....

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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 .....

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of TPO' s order (Page 26 of paper book) is extracted below: • "A notice U/s.92CA of the Income Tax Act along with questionnaire was issued to the assessee on 28. I O. 2005 requiring the assessee to furnish certain information and submit relevant documents. Authorized Representatives of the company appeared from time to time and furnish the required details and the case discussed with them. " • Paragraph 1 of the Assessment Order dt.31.03.2006 ....................... " .....

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Assessing Officer with respect to transactions with all the group companies. Reason - II raised by A.O. for reopening The assessment of the assessee company was completed U/s.143(3) and the Assessing Officer is not aware of the likely variations in income and assets and liabilities of SCSL at the time of assessment. The transactions revealed by Mr. Ramalingaraju apparently will have bearing on the affairs of the group companies and their consequence income and assets position in view of the com .....

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iary 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 .....

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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 no relevance to its assessments. • The assessee company is not an investment company nor has acquired an .....

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he board consisted of three directors each nominated by both the partners. The organizational structure and the nature of operations do not in any way have remotest possible connection with any of the investment or front companies alleged by the AO. Hence, a reason though not necessarily conclusive, should have a minimum relevance to the nature of the business, transactions of the assessee company and, finally the income of the Company. The reasons cited by the AO are farfetched and fail to brin .....

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t. Arguments by the Ld Counsel s with respect to Reason III are as follows: • The reasoning under this is vague and general. It is a surmise and guess work of the AO. The AO had not presented any evidence that the financial statements of front companies are not true or fair. This is a conclusion without rational connection with the evidence (Statement of Mr.B.Ramalinga Raju) for formation belief. The claim u/s 10A of SCSL has no relevance with assessment of SVES. • The assessee company .....

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d 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 .....

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. On the above reason, given the managerial and financial nexus between your company and parent company, SCSL, the assessing officer had prima facie reason to believe that the income chargeable to tax had escaped assessment given the volume of transactions and the item-wise confession made by the then Chairman of SCSL. In view of the above, your objection that the statement of Sri B.Ramalinga Raju does not contribute to subscribe to the reason to believe that income chargeable to tax had escaped .....

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mitted as follows: 17. The first two adjustments arise out of the Transfer Pricing Officer having changed his opinion in respect of determination of the arm's length price of the international transactions. None of the reasons cited by the AO for reopening of the assessment had indicated any possible escapement. The escapement of income contemplated U/s.147 should arise from either non recording of a particular stream of income / expenditure or short or excess recording thereof. Transfer Pri .....

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t. 18. Apart from the above, adjustment 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 reaso .....

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xplanation 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 .....

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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 Dadani (30 Taxmann.com I. Guj.) 23. The DR relied on the decision in the case of Majinder Singh Kang v. CIT & Anr.(2012) 344 ITR 0358 and argued that re .....

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le evasion of tax. The Hon'ble Tribunal held as under. (iv) The reopening was on wrong foundation of reasoning of the financial implication between the assessee-company and M/s Satyam Computer Services Limited, which was no established in the reassessment to justify reopening. 19. Hence, there being no nexus or live-link with the reasons recorded and the ' formation of belief' to come to a conclusion that there was escapement of income and also since the assessment has been reopened .....

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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. .....

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nclusions 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 to reopen resulted in the assessment u/ s 143 (3) read with section 147. 26. 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 a .....

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s 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 . 27. 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 cas .....

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ct, 1961 after having assessed and re-assessed u/s 143(3) and section 263. Since we have decided the jurisdictional grounds in favour of the assessee, we are not adjudicating on the other grounds 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 int .....

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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 ₹ 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 ₹ 1.9 Crores had been reduced to ₹ 0.24 Crores based on the adjustment to the export turnover. This result .....

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of ₹ 86 Lakhs. Aggrieved by the said order both the revenue and the company are in cross appeals before the Hon'ble ITAT which are pending disposal. 4. This assessee is currently in appeal before the ITAT. The facts relating to this assessment are given below: 5. The AO issued a notice dated 14.03.2011 U/s.148 reopening the assessment and requesting the company to file a return of income. The said notice was received by the company on 21.03.2011. Subsequent to the notice the company re .....

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evaluation and also to special audit u/s 142(2A). Nature of addition Amount (Rs. In crores) ALP method by company ALP Method by TPO TPO order (adjustment on account of ALP) Commission and reimbursement of professional charges paid to AE 4.84 Export sales 2.52 CUP TNMM Total 7.36 AO order Section 10A adjustment to export sales under explanation 2(iv) under section 10A 1.64 Total 9.00 7. Based on the Special Auditor s report and TPO s order, AO made a draft assessment order by proposing the above .....

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r 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 asses .....

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dition 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) upon satisfaction of the AO that the assessee had failed to disclose fully and truly all material facts necessary for assessment for that assessment year. The reasons given by the AO to reopen assessment in the case of the company would provide a light on his reasonin .....

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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. explaining various facts derived from the statement of Mr.Ramalingaraju which according to him had a bearing on the assessment of the company. 14. The following are the three major reasons coming out of the reasons recoded by the AO to reopen the assessment U/s.147. The facts relating to th .....

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ng adjustment as suggested by the TPO U/s. 92CA in respect of income from export of engineering services and commission payment to one of the AE ie., 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 transac .....

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rse 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 ₹ 3,66,00,492 and ALP determined by the TPO of ₹ 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 o .....

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. He narrated the facts already available on assessment record and concluded ALP should have been at nil and demonstrated the change of his opinion by concluding the ALP should have been nil as against ₹ 2.8 Crores adopted in original assessment. This is a copy book replica of what an AO should not do for reopening an assessment u/s 147. Hence, there is neither reason nor a justification to reopen the assessment based on the above paragraphs. Reason - II given by the Assessing Officer is a .....

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n to believe that income chargeable to tax has escape assessment, within the meaning of Section 147 read with section 149 of the l. T Act. and there is failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment for A. Y 2004-05. For the above detailed reasons, it is proposed to issue notice to the assessee under section 148 of the I. T Act to re-open the assessment in the assessee's case for the assessment year 2004-05 for bringing to tax .....

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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 assessm .....

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. 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 stand poles apart without a nexus. Hence, th .....

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eri Stock Brokers Pvt Ltd. to explain the meaning of reason to believe to reopen the assessment U/s.l47. As held by the Supreme Court at the stage of initiation of proceedings the AO should have a reason to believe and need not establish the facts of escapement of income. The test laid down by the Supreme Court is, whether based on the information before the AO any reasonable person could have formed an opinion to reopen the assessment. Hence, the AO should have demonstrated by feeblest of the f .....

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action to the company, they are neither relevant to the assessment of the company nor require disclosure. 22. The ld DR relied on the decision in the case of Majinder Singh Kang v. CIT & Anr.(2012) 344 ITR 0358 and argued that reopening u/s 147 is valid. 23. 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 v .....

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f 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 .....

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and also by Gujarat High Court in the cazse of Inductotherm India (P) Ltd v. Dy. CIT in Special Civil Application 858 of 2006 dated 6.8.2012. Further Bombay Bench in the case of Delta Airlines Inc. Vs. ITO (International Taxation) (2013) 33 Taxmann.com 192(Mum). 26. We are of the opinion that there is no fresh fact or tangible material to come to the conclusion that there is escapement of income from assessment. The entire joint venture agreement understanding between the parties and considerati .....

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04/Hyd/2011 (A.Y 2002-03) Assessee s Appeal: 1. Assessee filed return of income for A.Y 2002-03 on 31.10.2012 declaring a total income of ₹ 24,97,979. The company claimed exemption u/s 10A to the extent of ₹ 3,93,35,453. The said return of income was processed u/s 143(1) on 6.2.2003. Subsequently the assessment proceedings were reopened on 26.03.2009 u/s 148. 2. AO reopened the said proceedings u/s 148 by recording reasons for such reopening as required u/s 147. The AO recorded that .....

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ax. 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 .....

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e 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 Pricin .....

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rores to Venture Global @ 10% on the gross sales. Assessee explained to the TPO that the commission was paid to the JV Partner Venture Global Engineering Services LLC that the said payments was made for customer identification, introduction, customer relations management and work solicitation and procurement. TPO failed to appreciate the object of the joint venture and the business synergy brought into the assessee company by both the JV Partners. He considered CUP method as the most appropriate .....

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He observed that the assessee had used multiple year data for 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 .....

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efore 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 .....

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r from the total turnover . 15. The Department raised no objection for admission of the additional grounds. Hence, we admit the same. 16. The DR relied on the decision in the case of Majinder Singh Kang v. CIT & Anr.(2012) 344 ITR 0358 and argued that reopening u/s 147 is valid. 17. 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 assess .....

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ld Counsel further submitted that the reasons recorded by the AO on the file are as follows: i) Mr S Ramalinga Raju, Ex-Chairman of SCSL wrote a letter to the Board of Directors of SCSL on 7 Jan 2009 confessing that the books of accounts of SCSL were not reported correctly. Mr Ramalinga Raju had also stated in his letter that the subsidiaries are reflecting true performance. ii) Sworn deposition recorded by the Department. Reiteration of the facts mentioned in the above letter. iii). Informatio .....

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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, r .....

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r 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 could lead to the formation of belief that income char .....

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e., beyond the period of 4 years from the end of the assessment year. The case falls under Sec.149( 1 )(b), the prerequisite for applying this section being that income of Rs.One Lakh or more should have escaped assessment. The reasons recorded by the A.O have not pinpointed as to which transaction(s) or events have resulted in underassessment of income of Rs.One Lakh or more. In this connection we rely on the undermentioned decisions for the proposition that where the Assessing Officer has not .....

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on the reason to ascertain the income if any had escaped. None of the reasons recorded by the AO indicates a lead for further inquiry to an area or group of transactions 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 n .....

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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 .....

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Ranbaxy Laboratories Ltd vs. CIT (12 Taxmann.com 74 Delhi) • CIT vs. Mohd. Juned Dadani (30 Taxmann.com I. Guj.) 27. We heard both the parties. In a recent case the Hyderabad bench of the Tribunal in the case of Rohini Boitecb (P) Ltd and other, ITA No.1233/Hyd/2011 and other appeals jointly disposed vide order dated 31.12.2013, the issue of Section 147, especially in light of Satyam scam was examined. In these sixteen appeals also, assessments were reopened on sole ground that these compa .....

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nclusion that there was escapement of income and also since the assessment has been reopened beyond the period of 4 years when there is no failure on the part of the assessee to fully and truly disclose all material facts 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 .....

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