TMI Blog2016 (12) TMI 685X X X X Extracts X X X X X X X X Extracts X X X X ..... nity of urging before the TPO that no international transaction is involved. In the present case, PWH shall have full opportunity of impressing upon the TPO that it and Services BV are not associated enterprises. Whether or not Services BV participates directly or indirectly in the management or control or capital of PWH and whether or not at least one of the conditions mentioned in the sub-paragraphs (a) to (m) of Sec. 92A(2) of the Act is satisfied, are factual issues which the TPO is equipped and competent to decide. It is not proper or convenient nor desirable for a Writ Court to go into such disputed questions of fact. Further, the decision of the TPO is in the nature of an opinion. The TPO will send his opinion to the Assessing Officer who shall conduct the re- assessment proceeding taking into consideration such opinion of the TPO and upon notice to the assessee. The opinion of the TPO is not binding on the Assessing Officer. The assessee will have a second opportunity of arguing before the Assessing Officer or before the Dispute Resolution Panel as envisaged under Sec. 144C of the Act that the parties involved are not associated enterprises and hence there is no internat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aterhouse Anr.-vs.-Commissioner of Income Tax, Kolkata). Case of the petitioners: (3) The short point urged by Mr. Pal, Learned Sr. Counsel for the petitioners is that the reference to the TPO is without jurisdiction. As such all actions taken or contemplated pursuant to such reference are or would be bad in law. He submitted that the reference is ultra vires the Income Tax Act since the conditions precedent for a transaction to be international transaction within the meaning of Sec. 92B of the Income Tax Act are not fulfilled even assuming the correctness of the allegations based on which the impugned reference has been made. (4) Mr. Pal referred to Sec. 92 (Computation of income from international transaction having regard to arm s length price), Sec. 92A (meaning of associated enterprise), Sec. 92B (meaning of international transaction), Sec. 92CA (reference to Transfer Pricing Officer) and Sec. 92F(iii) (definition of enterprise) of the Income Tax Act. The main argument of Mr. Pal hinges on Sec. 92A and Sec. 92CA(1) of the IT Act and the same are set out hereunder:- S. 92A:-Meaning of associated enterprise_(1) For the purposes of this section and sections 92, 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quired for the manufacture or processing of goods or articles carried out by one enterprise, are supplied by the other enterprise, or by persons specified by the other enterprise, and the prices and other conditions relating to the supply are influenced by such other enterprises; or (i) the goods or articles manufactured or processed by one enterprise, are sold to the other enterprise or to persons specified by the other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprise; or (j) where one enterprise is controlled by an individual, the other enterprise is also controlled by such individual or his relative or jointly by such individual and relative of such individual; or (k) where one enterprise is controlled by a Hindu undivided family, the other enterprise is controlled by a member of such Hindu undivided family or by a relative of a member of, such Hindu undivided family or jointly by such member and his relative; or (l) where one enterprise is a firm, association of persons or body of individuals, the other enterprise holds not less than ten per cent interest in such firm, association of persons or body of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in the management or control or capital of both the enterprises shall not make them associated enterprises, unless the criteria specified in sub-Section (2) are fulfilled. (7) Mr. Pal then submitted that for the purpose of finding out the true meaning of a statutory provision, it is permissible to refer to external aids like Parliamentary materials including Bills and memorandum accompanying the Bills. In this connection he referred to a decision of the Hon ble Apex Court in the case of Allied Motors (P) Ltd.-vs.-Commissioner of Income Tax, Delhi, (1997) 3 SCC 472, in support of his submission that the memorandum to the Finance Bill can be used as an aid to interpret a particular section of the Finance Bill. In this connection he also relied on a decision of the Hon ble Supreme Court in the case of Pepper-vs.-Hart, (1993) AC 593, in support of the proposition that reference to Parliamentary material should be permitted as an aid to the construction of a legislation in order to give effect to the true intention of the legislation. He then referred to the Hon ble Apex Court s decision in the case of K. P. Varghese-vs.-Income Tax Officer, Ernakulam, (1981) 4 SCC 173, and submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith common standards and policies including those with respect to quality of services. Hence, while PWH is a member firm of the PwC Network, at the same time, it is a separate and independent legal entity whose affairs are managed and controlled only by its partners. (11) Learned Sr. Counsel then submitted that the PwC Network has member firms in over 150 countries including India. Each member firm has recognized that the business of its clients is increasingly being conducted on a worldwide basis with the result that such member firms need to cooperate with each other in the PwC Network so that professional services of high quality can be provided to mutual clients or other clients on a coordinated basis and each member firm has also recognized that in order to provide such coordinated client service it must maintain a high level of human, technological and capital resources consistent with the level required to be and maintained by other member firms and by the competitors. PwCIL acting for the benefit of PwC Network, sets standards, principles, strategies and policies applicable to all member firms and monitors and reviews their implementation by member firms. (12) Prisewa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght regarding use of any brand name as Services BV itself does not own any brand name. PWH is also not permitted to use the brand name of PricewaterhosueCoopers as per the Chartered Accountants Regulations, 1988. PWH has not taken any loan or guarantee from Services BV. During the year under consideration a non- refundable loan of INR 65,06,55,000/- was received by the PwC Network, to strengthen PWH s audit practices in India. Such loan was provided to meet the costs needed to improve the audit quality and training in the manner which allowed for sustainable operations and enhanced sustainable audit quality. The grant was received under the contractual arrangement existing between Services BV and PWH and has been accounted for as sundry income on an accrual basis and has been offered for taxation in computing the total income for the year under consideration as business income. PWH filed its income tax returns for the assessment year 2011-12 and also filed a revised return. The return filed by PWH was selected for scrutiny assessment by the assessing officer and notices under Secs. 143(2) and 142(1) of the IT Act were issued by the assessing officer requiring PWH to file its comput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al then submitted that the reference to the TPO has been made without application of mind as the respondent no. 3 completely ignored that in the past, in the identical factual pattern, the assessing officer accepted that the transactions between PWH and Services BV are not international transactions falling within the purview of Sec. 92B of the IT Act and consequently under Chapter X of the Act. The fact that the transactions between PWH and Services BV are not international transactions as per Sec. 92B of the Act was accepted in the immediate preceding year i.e. assessment year 2010-11 after making enquiries in respect of the same. Even during the pendency of the present writ petition, the view that the transactions between PWH and Services BV are not international transactions within the meaning of Sec. 92B of the Act was accepted during the revisionary proceedings for the assessment year 2009-10. Hence, there is no justification for the respondent no. 3 to take a different view on the same set of facts and law. In this Connection Mr. Pal relied on Hon ble Apex Court s decision in the case of M/s. Radhasoami Satsang, Soami Bagh, Agra-vs.-Commissioner of Income Tax, (1992) 1 SCC 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plained as to how and why payments were made in accordance with the service agreement made in 1998 for the assessment year 2010-11 when the new agreement dated 1 July, 2009 had been entered into and was presumably in force. This shows that both the agreements were in operation and were similar in all respect. In substance, it is Services BV which has financial and managerial control over PWH. A plain reading of the service agreements reveals that PWH has to utilize the services rendered by and practices envisaged by Services BV in all spheres of professional activity and Services BV shall constantly keep a watch over the activities and performance of PWH. (21) In the service agreements it is mentioned that Services BV does not provide any professional services to its clients. However, in its income returns, PWH has claimed the amount paid to Services BV as service charges. The details or nature of services rendered by Services BV to PWH have never been disclosed. No documentary/material evidence was ever produced to substantiate the claim of PWH. The documents which were produced were some sort of computer print outs akin to windows update messages which have very little authent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment year 2010-11 as non-refundable amount from Services BV. However, the said firm has not offered these amounts for taxation. The assessment in this behalf for the years 2009-10 and 2010-11 has been reopened under Sec. 147 of the IT Act. (27) No expenditure has been incurred by PWH for receiving the said non- refundable amounts from Services BV. Since PWH has not provided any professional services to Services BV, such non-refundable grants were held to be income from other sources in the assessment years 2009-10 and 2010- 11. No document justifying or explaining such non-refundable grant was produced for the assessment years 2009-10 and 2010-11. For the first time, in the assessment year 2011-12 an agreement dated 16 March, 2011 was produced, said to have been entered into by and between PWH and Services BV. This is a suspected document. The proper name of the authorised signatories on behalf of the parties to the agreement was not mentioned in the agreement. The agreement mentioned that it would be in full force and would be binding as of 01.03.2010. The assessment for the assessment year 2010-11 in the case of Lovelock Lewes was completed in March, 2013. Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so under the risk covered. (29) Learned Counsel then submitted that the assessees are Chartered Accountant firms, professionals and working in the services industries. If these two special incidents i.e. receipt of non-refundable grant and penalty are taken out from the profit and loss accounts of the assessees, it would appear that Lovelock and Lewes has incurred huge loss. Being in the service industry for several years, occurrence of huge loss is not comprehensible. It is only a window dressing of accounts made by the assessee which requires deeper and sustained investigations. (30) In the month of January/February, 2014 the investigation wing of the IT Department at Calcutta made enquiries pursuant to a tax evasion petition received in respect of PWH and Lovelock and Lewes. The ADIT (Investigation), Calcutta, in his report dated 17 February, 2014 has stated that the yearly payments made to Services BV by the writ petitioners were claimed as business expenses and such payments were made for services rendered by Services BV. The invoices did not specify the services allegedly rendered and only mentioned the period for which the payment was made. There was no concrete eviden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ortunity of persuading the Assessing Officer as to why the opinion of the TPO should be ignored. Hence, no real prejudice is caused to the assessee by reference of the issue of computation of arm s length price by the Assessing Officer to the TPO. In this connection, learned Counsel relied on a decision of a Division Bench of the Delhi High Court in the case of Sony India (P) Ltd.-vs.-Central Board of Direct Taxes, (2006) 157 TAXMAN 125. (33) Learned Counsel also referred to a decision of a Division Bench of Gujarat High Court in the case of Veer Gems-vs.-Assistant Commissioner of Income Tax, (2013) 351 ITR 34, in support of his submission that there is no provision under Chapter X of the IT Act which requires the Assessing Officer to give an opportunity of hearing to the assessee, consider his objections and only thereafter make a reference to the TPO to compute the arm s length price. Further, the assessee has more than one opportunity to contest the question of presence or absence of an international transaction. Firstly, he has an opportunity before the TPO. Then, once the opinion of the TPO is transmitted to the Assessing Officer, the assessee has a second opportunity befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his information was obtained by the Revenue in a subsequent year s assessment proceeding and accordingly the Department had reopened the case. This was challenged by the assessee. The Hon ble Apex Court held that the court was not to give a final decision as to whether there was suppression of material facts by the assessee or not. The court is only to see whether there was prima facie some material on the basis of which the Department could reopen the case. The sufficiency or correctness of the material was not a thing to be considered at this stage. It would be open to the assessee to prove that the assumption of facts made in the impugned notice was erroneous. All questions of fact and law were left open to be investigated and decided by the assessing authority. Court s View:- (38) Although arguments have been advanced at length on behalf of the parties, the issue involved in the present proceeding is a short one, i.e. whether the reference made by the respondent no. 3 to the TPO under Sec. 92CA(1) of the IT Act in respect of the petitioner companies is without jurisdiction or otherwise incompetent so as to warrant judicial intervention. (39) The sum and substance of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve full opportunity of urging before the TPO that no international transaction is involved. In the present case, PWH shall have full opportunity of impressing upon the TPO that it and Services BV are not associated enterprises. Whether or not Services BV participates directly or indirectly in the management or control or capital of PWH and whether or not at least one of the conditions mentioned in the sub-paragraphs (a) to (m) of Sec. 92A(2) of the Act is satisfied, are factual issues which the TPO is equipped and competent to decide. It is not proper or convenient nor desirable for a Writ Court to go into such disputed questions of fact. (42) Further, the decision of the TPO is in the nature of an opinion. The TPO will send his opinion to the Assessing Officer who shall conduct the re- assessment proceeding taking into consideration such opinion of the TPO and upon notice to the assessee. The opinion of the TPO is not binding on the Assessing Officer. The assessee will have a second opportunity of arguing before the Assessing Officer or before the Dispute Resolution Panel as envisaged under Sec. 144C of the Act that the parties involved are not associated enterprises and hence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t petitioner/assessee to impress upon the TPO that no international transaction is involved, in which case, the TPO will undoubtedly return an appropriate report to the Assessing Officer. In exercise of jurisdiction under Art. 226 of the Constitution of India, I am not in a position to hold that the factual issues contemplated in Sec. 92A(1) and (2) of the Act do not exist and as such the reference to the TPO was without jurisdiction. No case of mala fide or ex facie lack of jurisdiction has been made out by the petitioners and I am of the considered opinion that I should not stifle the reference to the TPO by nipping the same in the bud. If the stand of the writ petitioner company is bona fide and indeed if no international transaction is involved, I see no reason why the company should shy away from the proceeding before the TPO and not urge and establish the same in the proceeding before the TPO. (44) Mr. Pal also submitted that in the assessment year 2010-11, the Department accepted the fact that the transactions between PWH and Services BV are not international transactions within the meaning of Sec. 92B of the Act. Hence, there can be no justification for the Department to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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