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2016 (11) TMI 1304 - ITAT PUNE

2016 (11) TMI 1304 - ITAT PUNE - TMI - TPA - selection of comparable - Held that:- We uphold the order of CIT(A) in excluding the companies whose turnover was more than ₹ 200 crores. - Transfer pricing adjustment - bench marking technique - whether margins of provision of software development services and provision of on-site services by the assessee to its associate enterprises have to be computed cumulatively? - Held that:- Where the mark-up earned by the assessee is different from .....

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ed to benchmark the international transactions of provision of software development services i.e. off-site services independently from on-site services provided by way of consultancy services provided by the assessee. The Assessing Officer is also directed to adopt the segmental details of comparables, if available for benchmarking the international transactions of assessee. Accordingly, this aspect of transfer pricing adjustment, if any, is remitted back to the file of Assessing Officer, who is .....

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of the Act for the purposes of computing the arm's length price in relation to the international transaction. Consequently, order passed by the TPO under section 92CA(3) proposing an adjustment of ₹ 2,60,00,882/- to the arm's length price of the international transaction was a nullity in law and void ab initio. In view of the above-said facts and circumstances, such an order passed by the TPO was not a valid material for the Assessing Officer to entertain a belief that certain income char .....

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The Assessee : Shri M.P. Lohia For The Revenue : S/Shri S.K. Rastogi, CIT and Sushil Kulkarni ORDER PER SUSHMA CHOWLA, JM: Out of this bunch of appeals, one appeal filed by the Revenue and two cross objections filed by the assessee are against consolidated order of CIT(A)- IT/TP, Pune, dated 21.01.2013 relating to assessment years 2004-05 and 2005- 06 against respective orders passed under section 143(3) of the Income-tax Act, 1961 (in short the Act ). Further, the cross appeal filed by the ass .....

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filed by the assessee both in assessment years 2004-05 and 2005-06, hence, the same are dismissed as withdrawn. The assessee has also filed an application under Rule 27 for assessment years 2004-05 and 2005-06. 4. First, we shall take up the appeal in ITA No.810/PN/2013 relating to assessment year 2004-05. The grounds of appeal raised by the Revenue are as under:- 1. The order of the Commissioner of Income-tax (Appeals) is contrary to law and to the facts and circumstances of the case. 2. The C .....

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shore services were different form each other. 4. The Commissioner of Income-tax (Appeals) erred on facts and in law in not appreciating the fact that different markups for onsite and offshore services indicate towards functional and risk profile being different for onsite & offshore segments. 5. For this and such other reasons as may be urged at the time of hearing the order of the Commissioner of Income-tax (Appeals) may be vacated and that of the AO be restored. 5. The ground of appeal No .....

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logy Park Scheme of Government of India. For the year under consideration, the assessee had filed return of income declaring total income of ₹ 2,04,740/-. The assessee was providing software development services to the SAS group companies overseas. During the year, it had two undertakings; one in Pune and the other in Mumbai. The undertaking in Mumbai was shut down in February, 2004 and was not registered under Software Technology Park Scheme. However, Pune unit was registered under Softwa .....

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ervices to its associate enterprises as tabulated at page 2 of the order of TPO. The assessee was providing both on-site and off-site services. The TPO also noted that the assessee in its transfer pricing report had prepared segmental profitability for software development and software consultancy services. The TNMM method was applied using operating margin over operating cost as the Profit Level Indicator (PLI), in order to test the arm s length nature of its international transactions. The ass .....

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ils and was asked to explain as to why an adjustment should not be made to arm's length price of transactions by taking the revised margins of comparables. The assessee in turn, explained its case which is not accepted by the TPO. The TPO noted that it was not that loss making companies had been removed from the list of comparables. However, only those companies which had reported huge losses in 2004 or which had very good profits in 2003 and had become loss making companies in 2004, had bee .....

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e software development services and the software consultancy services should be clubbed and then the margins of comparables would fall +/- 5% of arm s length range. The TPO noted that both these services were shown as separate segments in TP study report of the year and were benchmarked separately. The assessee s contention of aggregating the software development and software consultancy was not accepted by the TPO as the mark-up in software activities was 7.5% and the mark-up in software consul .....

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ervices, against which separate segmental profits were shown. However, the assessee had earned mark-up of 15.04% of cost in respect of such international transactions, the margins of comparable companies selected for benchmarking the first transaction of software development services were applied in benchmarking the provision of software consultancy services also. Where the assessee had earned cost plus mark-up of 15.04% and as the margin of comparable companies as earlier worked out was 14.18% .....

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made an addition of ₹ 62,83,059/- on account of adjustment as proposed by the TPO. The Assessing Officer also re-computed the deduction under section 10A of the Act by re -computing the profits for computing deduction under section 10A of the Act. 8. In appeal before the CIT(A), the assessee filed written submissions which are incorporated in the appellate order at pages 3 to 7 of the appellate order. Various issues were raised by the assessee before the CIT(A) in respect of TP adjustment .....

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cost protective environment and the business module followed by the assessee did not envisage incurring of losses. With regard to turnover filter, the CIT(A) noted that before the TPO the assessee had requested for applying filter of ₹ 1 to 50 crores. However, the CIT(A) noted that the TPO had not applied any turnover filter. The CIT(A) took note of the decision of Bangalore Bench of Tribunal in Genisys Integrating System (India) Pvt. Ltd. Vs. DCIT (2012) 64 DTR 225 (Bang) (Trib), wherein .....

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hnologies Ltd., Larsen & Toubro InfoTech Ltd. and Satyam Computer Services Ltd. from the set of comparable companies. The next plea raised by the assessee was against the order of TPO in only considering the operating margins derived from off-shore software development services and not from the entire software development services. The contention of the assessee in this regard was that the software development services rendered from India and on-site software development services were of sim .....

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re development model. The CIT(A) held that he was in agreement with the contention of assessee that onsite software services and off-shore services should not be treated differently especially when comparable companies results reflected combined margin from both the services of on-site and off-shore software services. The CIT(A) further held that if the TPO had compared the combined margins of both the segments, then there was no justification to adopt the assessee s margin only from on-site sof .....

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g the aggregate margins of assessee from on-site as well as off-shore services for computing the arm's length price despite the fact that the mark-up for on-site and off-shore were different from each other. The said issue has been raised by way of ground of appeal No.3. By way of ground of appeal No.4, the Revenue has agitated that the CIT(A) has erred in not appreciating the fact that there were different mark-ups for on-site and off-shore services, which indicate towards functional and ri .....

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₹ 1.70 crores separately in the said report. He further pointed out that the assessee in TP study report had separately benchmarked two transactions and had prepared its report. In respect of provision of software development services, the assessee had selected 24 companies whose arithmetic mean of margin worked out to 2.20% as against the PLI of assessee at 7.5%, which was found to be at arm s length by the assessee. However, the TPO rejected the companies where the data was not available .....

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es be applied, however, the CIT(A) directed that filter of ₹ 1 to 200 crores be applied. In this regard, the learned Departmental Representative for the Revenue placed reliance on the order of TPO, in respect of second part of order of CIT(A), wherein he had directed that both the services provided by the assessee should be considered cumulatively. The learned Departmental Representative for the Revenue pointed out that in respect of aforesaid services, the assessee was reimbursed at cost .....

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ng cost, the same was within range of its comparables. In respect of provision for on-site services, wherein net profit margins from on-site services by the assessee was 15.04% and operating cost found to be within range of its comparables. Further reference was made to the computation of margin analysis of software services comparables at pages 68 and 69 for provision of off-shore services and at page 70 for provision of on-site services. The learned Departmental Representative for the Revenue .....

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.com 91 (Pune-Trib.), relating to assessment year 2008-09 and TIBCO Software (India) (P.) Ltd. Vs. DCIT (2015) 58 taxmann.com 215 (Pune -Trib.), relating to assessment year 2009-10. Just because the comparables picked up by the assessee were same and results of two i.e. provision of off-shore and onsite services should be clubbed, as per the learned Departmental Representative for the Revenue was wrong and submissions of the assessee before the CIT(A) in this regard, especially in the case of as .....

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issue decided by the CIT(A), the learned Authorized Representative for the assessee pointed out that Goldstone Technologies Ltd. had made segmental reporting of its earnings. However, in respect of others, no separate figures were available to show whether they have on-site and off-shore or only off-site services provided to its associate enterprises. The learned Authorized Representative for the assessee further pointed out that while benchmarking the international transactions in assessment ye .....

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turnover is decided in favour of the assessee, then the application moved under Rule 27 would become academic. 12. The learned Departmental Representative for the Revenue in rejoinder pointed out that some handicaps as with the assessee were with TPO and where the assessee says that Infosys is comparable in its TP study report, then turnover filter fails. He further stressed that the assessee was shifting his stand which should not be allowed. In respect of Genisys, it was pointed out that it wa .....

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sessee was engaged in providing software development support and software consultancy services to SAS group entities. Various transactions were entered into by the assessee with its associate enterprises during the year under consideration. However, the issue which arises for adjudication is in respect of provision of software development support services to SAS Inc by the assessee to the extent of ₹ 10.08 crores. The international transaction which is the subject matter of appeal is the p .....

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es, the assessee was being reimbursed at cost plus 7.5%, whereas in respect of on-site services provided to overseas groups, the assessee was being reimbursed at cost plus 15.04%. However, in the TP study report, the assessee picked up same set of comparables whose arithmetic mean worked out to 11.75% and the same was held to be arm s length price in respect of both the transactions separately. The TPO re-worked the arithmetic mean of margins of comparable companies by applying the financial dat .....

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. However, the assessee in respect of provision of on-site services had shown its margin at 15.04%, the same was held to be at arm's length price and no adjustment was proposed on account of said services provided by the assessee to its associate enterprises. The CIT(A) while deciding the appeal of assessee had directed the Assessing Officer / TPO to apply turnover filter of ₹ 1 to 200 crores while finally selecting the list of comparables. The Revenue is in appeal against the directio .....

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ing within turnover criteria. The Bangalore Bench of Tribunal in Bench of Tribunal in Genisys Integrating System (India) Pvt. Ltd. Vs. DCIT (supra) had applied turnover filter of ₹ 1 to 200 crores in the case of concern which was showing turnover of ₹ 8.15 crores. The assessee before us has declared turnover of ₹ 10.08 crores in segment of provision of software development services and in view of filter applied by the Bangalore Bench of Tribunal in Bench of Tribunal in Genisys .....

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mp; Services Ltd., (ii) Infosys BPO Ltd. and (iii) Wipro Ltd. on the ground that the turnover of the said companies was high as compared to the turnover of assessee in that case at ₹ 11 crores. The turnover of HCL Comnet Systems & Services Ltd. was ₹ 260.18 crores, of Infosys BPO Ltd., was ₹ 649.56 crores and of Wipro Ltd. was ₹ 939.78 crores. The said companies were excluded by the Tribunal on the basis of turnover filter, which was approved by the Hon ble High Court .....

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he next direction of the CIT(A) in holding that the margins of provision of software development services and provision of on-site services by the assessee to its associate enterprises have to be computed cumulatively. The first aspect to be noted in the case is that while the assessee is providing several services to its associate enterprises and it has recognized that it is providing two kinds of services i.e. provision of software development services and provision of software consultancy ser .....

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mbursed by its associate enterprises in respect of off-site services is lower at cost plus 7.5% and in respect of on-site services is higher at cost plus 15.04%. In its TP study report, the assessee had benchmarked two transactions separately and had held them to be at arm's length price by taking the mean of list of comparables. However, since this was the start of transfer pricing study provisions, the complete details were not looked into by both the assessee and the Revenue. The followin .....

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r of CIT(A) in this regard. The law has developed in the field of transfer pricing provisions. The issue as to whether an activity being provided by a concern on account of off-site services and on-site services have been compared and it has been held that the company engaged in providing on-site services is un-comparable to the company engaged in providing off-shore services. The said ratio has been laid down by the Pune Bench of Tribunal in TIBCO Software India (P.) Ltd. Vs. DCIT relating to a .....

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ional transactions. The basis on which the assessee before us is being reimbursed on account of its off-site services is cost plus 7.5% and for on-site services, it is being reimbursed at cost plus 15.04%, which itself establish that the two services provided by the assessee are different and the same cannot be clubbed for the purpose of benchmarking the international transactions. We reverse the order of CIT(A) in this regard and direct the Assessing Officer to re-compute the same. Where the ma .....

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e case of assessee. The Assessing Officer is directed to benchmark the international transactions of provision of software development services i.e. off-site services independently from on-site services provided by way of consultancy services provided by the assessee. The Assessing Officer is also directed to adopt the segmental details of comparables, if available for benchmarking the international transactions of assessee. Accordingly, this aspect of transfer pricing adjustment, if any, is rem .....

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ied as directed by the CIT(A), then the application moved under Rule 27 of Income Tax Ru les, 1962 (in short the Rules ) would become academic. Since we have upheld the turnover filter applied by the CIT(A), the application under Rule 27 of the Rules is dismissed as academic. 18. The assessee had also filed application under Rule 27 of the Rules for assessment year 2005-06. But no plea has been raised by the learned Authorized Representative for the assessee and the same is dismissed. 19. The as .....

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dmitting that the reassessment proceedings are valid and without prejudice to the above ground, erred in upholding that there was no need to make fresh reference to the TPO for determination of arm's length price of international transactions, after initiating proceedings under section 147 of the Act. Deprivation of opportunity of appeal before the DRP 3. Without prejudice to the above grounds regarding validity of reassessment proceedings under section 147 of the Act, erred in upholding the .....

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king fresh reference to the TPO. 21. Briefly, in the facts of the present case, the assessee is in appeal against the order of Assessing Officer passed under section 143(3) r.w.s. 147 of the Act. The original return of income was filed by the assessee declaring total income of ₹ 14,06,487/- after claiming deduction of ₹ 3,53,65,382/- under section 10A of the Act on 24.11.200 6. In order to understand the issue, it is necessary to go through chronological events in respect of assessme .....

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dity of notice issued by the Assessing Officer under section 143(2) of the Act vide letter dated 11.11.2009, after which the Assessing Officer had passed draft assessment order under section 144C of the Act on 27.11.2009. The assessee filed objections before the Dispute Resolution Panel (in short the DRP ) on 24.12.2009, who in turn, issued directions and upheld the order of Assessing Officer with respect to transfer pricing additions under section 143(3) r.w.s. 92CA(4) of the Act and section 14 .....

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ice under section 148 of the Act on 13.01.2011 . The reasons recorded for reopening the assessment and issue of notice under section 148 of the Act are reproduced in the assessment order under para 2 at page 1 of the assessment order. The perusal of reasons reflects that the reference is made to the international transactions entered into by the assessee with its associate enterprises and the adjustments sought to be made by the TPO at ₹ 2.60 crores and in view thereof, the Assessing Offic .....

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the reasons for reopening the assessment and also challenged the validity of assessment proceedings initiated under section 147 of the Act vide letter dated 02.02.2011 placed at page 267 of the Paper Book. The Assessing Officer in return, furnished reasons on 07.02.2011, copy of which is placed at pages 270 and 271 of the Paper Book. The assessee challenged the validity of proceedings initiated under section 147 of the Act and also objected to the reasons furnished by the Assessing Officer for .....

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-assessment proceedings and passed the order under section 143(3) r.w.s. 147 of the Act dated 28.12.2011, against which the assessee filed an appeal before the CIT(A), who in turn, upheld the re-assessment order passed. 22. The assessee is in appeal against the re-assessment order passed by the Assessing Officer which has been upheld by the CIT(A). 23. The plea of the assessee before us was that when originally the case of the assessee was selected for assessment, under which reference was made .....

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out that while initiating re-assessment proceedings, there was no reason to believe that income had escaped assessment. Since the Assessing Officer was merely making reference to the order of TPO, there was no independent application of mind by the Assessing Officer. In the absence of any independent application of mind on the part of Assessing Officer, it is alleged that re-assessment proceedings initiated in the case were in-valid. With regard to the order of CIT(A), it is pointed out that th .....

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rdinate Bench of Pune Tribunal in the case of Maximize Learning (P.) Ltd. Vs. ACIT in ITA No.2234/PN/2012, relating to assessment year 2007-08, order dated 02.02.2015 and the facts and issue were pointed out to be identical. The assessee in this regard has filed a comparative chart between the facts and issue arising in the case of Maximize Learning Pvt. Ltd. (supra) and in the present case and has stressed that since the re-assessment proceedings have been quashed in the case of Maximize Learni .....

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ng the assessment under section 147/148 of the Act and the assessment order passed by the Assessing Officer in this regard was a nullity and was not curable defect. The learned Authorized Representative for the assessee placed reliance on the order of Hon ble High Court of Madras in Vijay Televi sion (P) Ltd. Vs. DRP & Ors. (2014) 369 ITR 113 (Mad). He further pointed out that once the re-assessment order passed by the Assessing Officer is said to be nullity, then no addition is warranted in .....

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in Maximize Learning Pvt. Ltd. Vs. ACIT (supra). It was pointed out by the learned Authorized Representative for the assessee that re-assessment proceedings under section 147/148 of the Act were initiated in both the cases, wherein the original return of income was filed in time, however, the assessment proceedings in the case of assessee before us relate to assessment year 2006-07 and in the case of Maximize Learning Pvt. Ltd. (supra) relate to assessment year 2007-08. Admittedly, in both the c .....

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In both the cases, in such assessment proceedings, reference was made to the TPO for determining the arm's length price of international transactions and the TPO had passed the order under section 92CA(3) of the Act. However, in both the cases, the assessee filed objections to the draft assessment order and the DRP directed the Assessing Officer to examine the plea of assessee vis-à-vis validity of assessment proceedings. Thereafter, the assessment proceedings under section 143(3) of .....

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assessment proceedings, which were held to be invalid. The question which arises is the validity of re24 assessment proceedings on the surmise that an adjustment has to be made on account of arm's length price of international transactions in the hands of assessee on the basis of such reference, during the course of assessment proceedings, which were held to be invalid. After going through the factual and legal aspects of the case, the Tribunal vide order dated 02.02.2015 (supra) had firstl .....

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ower an Assessing Officer to assess or re-assess such income which has escaped assessment. Section 147 of the Act postulates that if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may subject to the provisions of sections 148 to 153 of the Act, assess or re-assess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of proceedi .....

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the Assessing Officer has entertained the belief for escapement of income based on an order of the TPO dated 29.10.2010 u/s 92CA(3) 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 s .....

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001 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 expressions associated enterprise and international transaction respectively. Section 92C of the Act contains the powers of the Assessing Officer and the manner of determination of .....

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ction 92E of the Act prescribes that the person entering into international transaction shall furnish a report from a chartered accountant in Form No.3CEB. Section 92F of the Act contains definitions of certain terms which are relevant to compute arm's length price, etc. in terms of sections 92 to 92F of the Act. 13. Notably, the entire scheme and mechanism to compute any income arising from an international transaction entered between associated enterprises is contained in sections 92 to 92 .....

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ssessing Officer to determine the arm's length price in relation to an international transaction in accordance with the methods prescribed in sub-section (1), on the basis of material or information or documents available with him, after allowing the assessee an opportunity in this regard; and, sub-section (4) of section 92C provides that where the Assessing Officer so determines the arm's length price, he may compute the total income of the assessee having regard to the arm's length .....

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tion (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 .....

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regard to the arm's length price of the international transaction so determined, either in terms of sub-section (4) of section 92C or sub-section (4) of section 92CA. Notably, sub-section (4) of section 92C comes into play where an arm's length price in relation to the international transaction is determined by the Assessing Officer and sub-section (4) of section 92CA comes into play where the arm's length price in relation to an international transaction is determined by the TPO, on .....

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the Assessing Officer determines the arm's length price or under sub-sections (1) to (3) of section 92CA, where the Assessing Officer refers the determination of arm's length price to the TPO. We may also refer to the provisions of section 143(3) of the Act dealing with assessment of income. In terms of clause (ii) of sub-section (3) of section 143, it is prescribed that the Assessing Officer shall, by an order in writing, make an assessment of the total income or loss of the assessee, a .....

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of the process of assessment of total income before the Assessing Officer, which culminates in an order under section 143(3) or section 144 of the Act, as the case may be ? 16. In-fact, the occasion which requires the Assessing Officer to compute income from an international transaction arises only during the assessment 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 .....

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egate value of which exceeds ₹ 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 As .....

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to an international transaction to the TPO u/s 92CA of the Act. Therefore, we are inclined to uphold the position sought to be canvassed by the assessee that an Assessing Officer can make reference to the TPO u/s 92CA of the Act only after selecting the case for scrutiny assessment. In-fact, the aforesaid underlined observations of the CBDT Instruction (supra) is a pointer to the legislative import that the reference to the TPO for determining the arm's length price in relation to an intern .....

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8. In the context of the aforesaid controversy, we may refer to the arguments raised by the Ld. CIT-DR whereby it is contended that it was open for the Assessing Officer to make a reference to the TPO for determination of arm's length price without issuing notice u/s 143(2) of the Act; in other words, as per the Revenue, reference to the TPO u/s 92CA of the Act can be made even if no assessment proceeding is pending before the Assessing Officer. In this context, it is submitted that the annu .....

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vered 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 matt .....

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ssessment contained in sections 92 to 92F. The entire purpose of computation of arm's length price in relation to an international transaction is found in sub-section (1) of section 92 of the Act. Section 92(1) mandates that any income arising from an international transaction shall be computed having regard to the arm's length price. Therefore, the sole aim of computing the arm's length price in relation to any international transaction is to compute the income arising therefrom. Th .....

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international transaction or a reference to the TPO to determine arm's length price can be initiated in the absence of any proceeding for computing total income of the assessee. 20. Further, in our view, the Ld. CIT-DR has relied on one of the norms prescribed for picking a return for scrutiny assessment to say that certain exercise is required to be done on the part of the Assessing Officer to record his satisfaction before the matter is put-up to the CCIT/DGIT who shall approve the selecti .....

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the arm's length price in relation to international transaction arises only and only when the income from such international transaction is being assessed. Certainly, the reference to the TPO for the computation of arm's length price cannot precede the initiation of the assessment proceedings by the Assessing Officer by issuance of notice u/s 143(2) of the Act. 21. As per the Ld. CIT-DR, section 92C(3) or 92CA of the Act do not enjoin the Assessing Officer to have any assessment proceed .....

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ssary 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 .....

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do not operate in individual spheres but the same operate with a singular purpose of computing income arising from an international transaction. The process of computation of income is necessarily a part and parcel of the assessment proceedings envisaged under the Act. Section 92CA of the Act is not an independent provision, but it is triggered only when the occasion arises for application of section 92(1) of the Act, whereby income from an international transaction is to be computed having reg .....

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#39;s length price in relation to the international transaction when no assessment proceedings are pending in relation to the relevant assessment year. 27. The Tribunal further held that when reference was made to the TPO by the Assessing Officer for determination of arm's length price in relation to the international transaction, no assessment proceedings were pending and hence it was an invalid reference. Consequently, the subsequent order passed by the TPO determining the adjustment to th .....

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rise. The TPO, after allowing the assessee opportunity of being heard and after taking into account the 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 p .....

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e 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 reinforced by the CBDT Circular No.549 dated 31.10.1989. As per the CBDT, if, after furnishing return of income, an assessee does not receive a notice u/s 143(2) of the Act from the Department within .....

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t in the case of Vipan Khanna vs. CIT and Others, 255 ITR 220 (P&H) is also to the same effect. In-fact, as per the Hon ble Punjab & Haryana High Court, in case where a return is filed and is processed and no notice under sub-section (2) of section 143 thereafter is served on the assessee within the stipulated period, the assessment proceedings u/s 143 come to an end and matter becomes final. As per the Hon ble High Court, although technically no assessment is framed in such a case, yet .....

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cer to have made a reference to the TPO for determination of arm's length price of the international transactions in terms of section 92CA of the Act. We have already inferred in the earlier paras that under the provisions of section 92CA of the Act, a reference to the TPO for computation of arm's length price in relation to international transactions is permissible only in the course of the assessment proceedings. 27. In view of the aforesaid discussion, it has to be inferred that when .....

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bove 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 a .....

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ection 147 of the Act. 29. In this context, the Ld. CID-DR has vehemently pointed out that the return of income filed by the assessee included international transactions entered with the associated enterprise and such return of income was required to be taken-up for compulsory scrutiny, as per the norms of the CBDT relating to assessment year 2007-08. Therefore, when such a return of income was not picked up for a scrutiny assessment within the stipulated period, the only course for the Revenue .....

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nsactions with associated enterprises. For this reason, the case of the assessee had escaped from compulsory selection for scrutiny. On this basis, it is sought to be pointed out that the re-opening of assessment by issuance of notice u/s 147/148 of the Act is justified. 30. Apart from the aforesaid, it was also vehemently argued that any illegality or irregularity in making of a reference to the TPO u/s 92CA of the Act cannot render the subsequent order passed by the TPO u/s 92CA(3) of the Act .....

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and seizure action. Drawing a similar analogy to the facts of the present case, it is contended that an illegal or incorrect reference to the TPO would not invalidate the arm's length price determined by him u/s 92CA(3) of the Act, which showed that an adjustment of ₹ 2,49,43,811/- was required to 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 cha .....

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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 C .....

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; (iii) G.M. Rajgharia vs. ITO, (1975) 98 ITR 486 (Pat.); (iv) Asa John Devinathan vs. Addl. CIT, (1980) 126 ITR 270 (Mad.); (v) East Coast Commercial Co. Ltd. vs. ITO, (1981) 128 ITR 326 (Cal.); (vi) Equitable Investment Co. (P.) Ltd. vs. ITO, (1988) 174 ITR 714 (Cal.); and, (vii) S. Sreeramachandra Murthy vs. DCIT, (2000) 243 ITR 427 (AP). held as under :- The ratio laid down in all these cases is that, having regard to the entire scheme and purpose of the Act, the validity of the assumption o .....

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of law. 32. To the similar effect is the judgement of the Hon ble Bombay High Court in the case of 31 Infotech Ltd. vs. ACIT, (2010) 329 ITR 257 (Bom.) wherein it has been held that the validity of the reopening of assessment has to be determined with reference to the reasons which had weighed with the Assessing Officer and those cannot be added to or supported on a basis which was not present to the mind of the Assessing Officer when he issued the notice to reopen the assessment. As a conseque .....

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ularity 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 inco .....

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belief that certain income chargeable to tax has escaped assessment within the meaning of section 147 of the Act. The controversy in the present case has to be adjudicated in the light of the parameters of section 147/148 of the Act. In a somewhat similar situation, the Hon ble Rajasthan High Court in the case of Brig B. Lal vs. WTO, 127 ITR 308 (Raj.) was dealing with a situation where the reopening of assessment was based on a report submitted by the Valuation Officer in an invalid reference. .....

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uarely applicable in the present case. Therefore, having regard to the peculiar facts of the present case, the proposition sought to be canvassed by the Ld. CIT-DR based on the decision in the case of Pooran Mal (supra) does not validate the issuance of notice u/s 148 of the Act to reopen the assessment in the present case. 34. The Ld. CIT-DR also relied upon the judgement of the Punjab & Haryana High Court in the case of M/s Coca Cola India Inc vs. ACIT, (2009) 177 taxmann.com 103 to say th .....

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its associated enterprises in the period prior to the assessment year 2002-03. The Revenue contended the suppression of profits on the ground of an order passed by the TPO under Chapter X after 01.04.2002 in relation to an assessment year after 01.04.2002. Such order of the TPO formed the basis for the Assessing Officer to formulate a belief that there was an escapement of income within the meaning of section 147 of the Act for the period prior to assessment year 2002- 03. Pertinently, in the p .....

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ed 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 prio .....

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ent for a period prior to the introduction of the amended Chapter X with effect from 01.04.2002. Clearly, the dispute in the case of M/s Coca Cola India Inc (supra) stood on a different footing than the dispute before us. In the case of M/s Coca Cola India Inc (supra), it was nobody s case that there was any illegality in the reference made to the TPO or that the order of the TPO was void ab initio with respect to the assessment year for which the TPO passed the order u/s 92CA(3) of the Act. The .....

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e of the Revenue. 35. As a consequence, we conclude by holding that the reasons recorded by the Assessing Officer in the present case do not meet with the requirements of section 147 of the Act and therefore the Assessing Officer had no jurisdiction to issue notice u/s 148 of the Act dated 14.01.2011. As a consequence, the subsequent assessment order passed u/s 143(3) r.w.s. 147 and 144C(13) of the Act is liable to be quashed. We hold so. 29. As referred to by us in the paras hereinabove the fac .....

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computing the arm's length price in relation to the international transaction. Consequently, order passed by the TPO under section 92CA(3) proposing an adjustment of ₹ 2,60,00,882/- to the arm's length price of the international transaction was a nullity in law and void ab initio. In view of the above-said facts and circumstances, such an order passed by the TPO was not a valid material for the Assessing Officer to entertain a belief that certain income chargeable to tax had escape .....

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