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2016 (8) TMI 566 - GUJARAT HIGH COURT

2016 (8) TMI 566 - GUJARAT HIGH COURT - [2016] 389 ITR 162 - Transfer pricing adjustment - would the exceeding of 20% of share holding by the directors and relatives of the petitioner-company in the aggregate in Writers & Publishers Pvt. Ltd satisfy the requirement of clause (vi) of Section 40A(2)(b)? Held that:- Chapter X of the Act pertains to special provisions relating to avoidance of tax. Section 92 contained therein pertains to computation of income from international transaction having re .....

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cost or expense or any income in relation to the specified domestic transaction would be computed having regard to the arm's length price. - The directors of the petitioner company, in the aggregate, held more than 20% of the shares in voting power in Writers & Publishers Pvt. Ltd. The aggregate of expenditure incurred by the petitioner to such company exceeded ₹ 5 crores. Under the circumstances, we would allow the transfer pricing procedure to carry on further without interjecting at .....

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ng of the director or the relative of the director of the assessee company or the aggregate of the holdings is also not concluded in this petition. - SPECIAL CIVIL APPLICATION NO. 5035 of 2016 - Dated:- 10-8-2016 - MR. AKIL KURESHI AND MR. A.J. SHASTRI, JJ. FOR THE PETITIONER : MR S N SOPARKAR WITH MR B S SOPARKAR, ADVOCATE FOR THE RESPONDENT : MR MANISH BHATT WITH MRS MAUNA M BHATT, ADVOCATE ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. The petitioner has challenged reference made .....

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which, the petitioner's objection for reference to the TPO came to be rejected. 2. Briefly stated, the facts are that: The petitioner is a company registered under the Companies Act. For the assessment year 2013-14, the petitioner filed a return of income on 27.09.2013 disclosing total income of ₹ 330.00 crores (rounded off). A revised return was filed for the said year on 31.03.2015, however, the declaration of income did not change. Such return was taken in scrutiny by the Assessing .....

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ipal Commissioner of Income Tax, rejected the petitioner's objections by an order dated 10.03.2016. The petitioner raised further objections under letter dated 18.03.2016 which were also rejected by an order dated 22.03.2016. At which point, the petitioner has approached this Court. 3. Case of the petitioner is that the provisions of transfer pricing did not apply to the petitioner. There were no international transactions nor were there any specified domestic transaction within the meaning .....

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y the petitioner's objections should be rejected. Relevant portion of this report reads as under: The assessee mainly based its objection contending that the related party transactions reported in the audited account is in accordance with AS-18 and such transaction is not a transaction as provided in Section 40A(2)(b) of the Act. The assessee further contended that the specified transaction has been defined in Section 92BA of the Act and the assessee is covered only by clause (I) and (vi) of .....

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nd to be incorrect. The assessee ought to have obtained the report as required u/s. 92E of the Act if any other transaction including the transactions defined in as defined in clause (v) of section 92F of the Act, exceeding the limit of ₹ 5 crore. The assessee admitted that the following are th covered persons u/s. 40A(2) (b) of the Act. No. Name of the Person A/E Nature Amount 1 R C Printers Rent 12275136 2 I Media Corp Ltd. Advertisement & Publicity 4303048 3 Sudir Agrawal Salary 600 .....

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has not be prescribed. The averment of the assessee in this respect is found to be incorrect. As stated above, clause (v) of Section 92F of the Act defined the transaction as transaction includes an arrangement, understanding or action in correct. In view of the above, the assessee clearly misinterpreted the provisions of Section 92BA of the Act. As any other transaction has been clearly defined in Section 92F(V) of the Act the assessee ought to have taken the transactions of the kind enumerate .....

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6000000 Do 4 Ramesh Chandra Agrawal Sitting Fees 42474 Do 5 Girish Agarwal Sitting Fees 84944 Do 6 Pawan Agarwal Sitting Fees 42472 Do 7 Kailash Chowdhary Sitting Fees 186124 Do 8 Piyush Pandey Sitting Fees 50562 Do 9 Hairsh Bijoor Sitting Fees 62472 Do 10 Ashwani SInghal Sitting Fees 186124 Do 11 Writers & Publishers Pvt. Ltd Advertisement 3541444 AEs within the meaning of Section 92A as common shareholder held more than 30% share of companies Rent 65339658 Interest income from intercorpor .....

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pect of which payment has been made or is to be made to a person referred in Section 40(A)(2)(b) of the Act in view of clause (I) of Section 92AB of the Act. 2. The assessee has to consider any other transactions including the transactions as defined in clause(v) of Section 92F of the Act, including loans and advances (given/paid) to AE/related persons in view of clause (vi) of Section 92BA. From the table given above, it can be seen that the assessee has entered into transactions which has exce .....

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ing us minutely through the details of the report of the Assessing Officer with a special focus on the above noted portion thereof, learned counsel Mr. Soparkar for the petitioner submitted that the petitioner had not entered into any international transaction with associated enterprise. Attempt on part of the Assessing Officer, therefore, to bring the petitioner's case within the transfer pricing wholly erroneous. He submitted that the reasons cited by the Assessing Officer in the said repo .....

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essing Officer cannot switch stand and take a diametrically opposite position. 6. Alternatively, counsel submitted that even these transactions referred to in para 11 of the report would not fall within the scope of Section 40A(2)(b) of the Act. He submitted that Clause (vi) of the said provision on which reliance is placed would not include the transaction since admittedly none of the directors of the petitioner-company held more than 20% of the shares of Writers and Publishers Pvt. Ltd or Bhas .....

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purpose of certain provision, it has been so provided specifically. In the present case, the reference of holding of a director would therefore must be understood in its normal grammatical meaning viz. holding of an individual director, without resorting to aggregation of the holding of the directors. In this respect, counsel relied on the decision of Division Bench of Punjab & Haryana High Court in case of Commissioner of Income Tax- 1, Ludhiana vs. Octave Apparels reported in [2014] 45 Tax .....

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essment years, the petitioner had filed necessary declarations for transfer pricing. In the present case, there was no such need, and the petitioner had, therefore, correctly not made any such declaration. 8. Counsel lastly submitted that when the basic facts necessary to bring the case of the petitioner within Section 92CA of the Act are missing, any reference by the Assessing Officer to the TPO would be wholly erroneous and without jurisdiction. He, therefore, submitted that the reference to t .....

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cer had the power to make a reference in terms of the sub section (1) of Section 92C of the Act. In this context, the counsel relied heavily on Clause (vi) of Section 40A(2)(b) of the Act and submitted that the provision nowhere prohibits aggregation of the holding of the directors of the company. Counsel relied on the decision of Veer Gems vs. Assistant Commissioner of Income Tax and anr (supra) to contend that at this stage, the minute scrutiny urged by the petitioner should not be undertaken. .....

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ic transaction. Essentially by virtue of the said provision in case of specified domestic transaction also, given other requirements being satisfied; transactions would be computed having regard to arms length price. As per the sub section (2A) which was also added by virtue of the same amendment any allowance or interest or allocation of any cost or expense or any income in relation to the specified domestic transaction would be computed having regard to the arm's length price. 11. Section .....

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iii) any transfer of goods or services referred to in sub section (8) of section 80-IA; (iv) any business transacted between the assessee and other person as referred to in sub section (10) of section 80- IA; (v) any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which provisions of sub section (8) or sub section (10) of section 80-IA are applicable; or (vi) any other transaction as may be prescribed, and where the aggregate of such transactions entered into .....

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40A(2)(b). Section 40A(2)(a) refers to a case where assessee incurs any expenditure in respect of which payment has been made or is to be made to any person referred to in clause (b). In such a situation, if the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made, it is open for the Assessing Officer to make deduction. Relevant portion of the clause (b) of .....

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y, or any relative of such director, partner or member, has a substantial interest in the business or profession of that person. Explanation.- For the purposes of this sub section, a person shall be deemed to have a substantial interest in a business or profession, if- (a) in a case where the business or profession is carried on by a company, such person is, at any time during the previous year, the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or .....

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ion of that person would be covered under the said provision. 14. We have noticed that the petitioner had made expenditure in the nature of advertisement, rent and purchase of investment in subsidy to Writers & Publishers Pvt. Ltd., aggregate of which admittedly exceeds ₹ 5 crores. The respondents have, in affidavit dated 08.08.2016, pointed out following details: 1. I am filing the present further affidavit to bring on record the substantial shareholding of directors and relatives of .....

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yoti Agarwal 3.95 Nikita Agarwal 0.97 Total 25.98 2. I humbly submit that as can be seen from the above, the directors of D.B.Corp. Ltd. and relatives of such directors hold more than 20% of the voting power in Writers and Publishers Pvt. Ltd. 15. To these factual aspects, the petitioner has raised no objection. In that view of the matter, the question would be, would the exceeding of 20% of share holding by the directors and relatives of the petitioner-company in the aggregate in Writers & .....

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in accordance with Section 92C of the Act. It was further held that Chapter X does not contained any provision under which, the Assessing Officer would require to hear assessee and consider the objections before making a reference to the TPO. However, it requires certain safeguards. The Assessing Officer to consider it necessary or expedient to make a reference and the reference has to be made with the prior approval of the Commissioner. It was further held that while framing the assessment in .....

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anel would also have the power to completely nullify the variations arising out of the order of TPO if it is found that there had, in fact, been no international transaction and that therefore, the reference itself was invalid. Relevant portion of the judgement reads as under: 14. Before making any such reference, sub-section (1) of Section 92C itself provides certain inbuilt safeguards. Firstly, the Assessing Officer has to consider it necessary or expedient to make a reference to the TPO and s .....

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ute to ensure that the reference is made only in appropriate cases with approval of the higher authority. 15. While framing the assessment in terms of the report submitted by the TPO under sub-section (3) of Section 92CA of the Act, there is nothing to prevent the Assessing Officers from considering the objections of the assessee that, in fact, there had been no international transaction between the assessee and any other person. If the assessee succeeds in establishing such fact, naturally the .....

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ub-section (3) of Section 92CA of the Act. Thus, in every case of variation of income pursuant to such order of the TPO, the Assessing Officer has to, at the first instance, forward a draft of the proposed order of assessment to the assessee. Under sub-section (2) of Section 144C of the Act, on receipt of such a draft order, the assessee has an option either to file his acceptance of the variation of the assessment or file his objection to any such variation with the Dispute Resolution Panel and .....

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ispute Resolution Panel may confirm, reduce or enhance the variations proposed on the draft order. Sub-section (11) of Section 144C of the Act provides that no direction under sub-section (5) shall be issued unless an opportunity is given to the assessee and the Assessing Officer. Sub-section (13) of Section 144C of the Act provides that upon receipt of directions issued under sub-section (5) of Section 144C of the Act, the Assessing Officer shall in conformity with the directions complete the a .....

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subsection (13) of Section 144C of the Act, such directions are binding upon the Assessing Officer. 19. The issue whether there was an international transaction or not can also be examined by the Dispute Resolution Panel at the instance of the assessee. There is nothing to limit the powers of Dispute Resolution Panel to completely nullify the variations arising out of the order of the TPO if it is found that there had, in fact, been no international transaction and that, therefore, the reference .....

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or wholly arbitrarily at his whim or caprice, make a reference of any transaction to the TPO for computation of the arm s length price. He is expected to exercise his discretion on the basis of available material on record. Such decision is subject to approval by the Commissioner. At the time of framing final assessment even the assessee will have right to point out that there had been, in fact, no international transaction between the assessee and the associated enterprise. 24. We are of the op .....

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