TMI Blog2017 (5) TMI 421X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act. Consequently, we hold that the reasons recorded for reopening the assessment under section 147 of the Act do not meet the requirements of the section and hence the Assessing Officer had no jurisdiction to issue notice under section 148 of the Act. Consequently, the subsequent order passed by the Assessing Officer under section 143(3) r.w.s. 147 and 144C of the Act is liable to be quashed. - Decided in favour of assessee. - ITA No.2480/PUN/2012 - - - Dated:- 5-5-2017 - MS. SUSHMA CHOWLA, JM AND SHRI RAJESH KUMAR, AM For The Appellant : Shri P.J. Pardiwala For The Respondent : Shri Rajeev Kumar ORDER PER SUSHMA CHOWLA, JM: The captioned appeal filed by the Assessee is against order of Assistant Commissioner of Income Tax, Circle-11(1), Pune, dated 29.10.2012 relating to assessment year 2007-08 passed under section 143(3) r.w.s. 147 and 144C of the Income-tax Act, 1961 (in short the Act ). 2. The Assessee has raised the following grounds of appeal:- The appellant objects to the order dated 29 October 2012 passed under section 143(3) r.w.s 147 and 144(C) of the Income-tax Act, 1961 ('the Act') by the Assistant Commissioner of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Officer ('TPO') under section 92CA(1) of the Act for the reassessment under section 147 of the Act. d.The learned DCIT / ACIT erred in not appreciating that a fresh reference under section 92CA(1) of the Act ought to have been made to the TPO for a reassessment initiated vide notice under section 148 of the Act, especially considering the fact that the reference which was made earlier to the TPO was invalid and bad in law in absence of any valid notice under section 143(2) of the Act. e.Without prejudice to the above, the learned DCIT/ACIT erred in not appreciating that a reference under section 92CA(1) of the Act can be made only with the prior approval of the Commissioner and they therefore erred in not communicating to the appellant whether the reference made earlier to the TPO under section 92CA(1) of the Act was after obtaining prior approval of the Commissioner or not. f. The learned DRP erred in upholding the reassessment made by the learned ACIT under the Act. g.The learned ACIT/DRP erred in not considering the submissions of the appellant in the correct perspective. 3. Disallowance of Advertising and Marketing ('A M') expense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant. c. The learned ACIT / DRP erred in holding that the provisions of section 194J of the Act were applicable to the selling discount given to HUL. d. The learned ACIT erred in holding that the selling discount given to HUL was nothing but commission paid to HUL under section 194H of the Act. The learned DRP erred in not giving any directions in respect of the same. e. The learned ACIT / DRP erred in not appreciating that the selling discount given to HUL was based on the sales achieved by HUL being the appellant's largest customer and not for any services rendered by HUL. f. The learned ACIT / DRP erred in not considering the submissions of the appellant / documentary evidence filed by the appellant in the correct perspective. g. Without prejudice to the above, the learned ACIT erred in considering the amount of ₹ 4,08,38,775/- for disallowance instead of the actual selling discount of ₹ 2, 76,30,251/- given to HUL. The learned DRP erred in not giving any directions in respect of the same. 6. Disallowance incorrectly made under section 40(a)(ia) of the Act a. Without prejudice to the above grounds of appeal, the learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curred by the appellant, Primarily the learned AO/ TPO has erred in: i. holding that incurring of A M expenses by the appellant is an international transaction merely on the basis of an assumption that an arrangement exists between the appellant and the AE for incurring such expenses without demonstrating based on the facts that any such an arrangement exists, and without appreciating that such expenses were incurred by the appellant on its own behalf and for the purposes of its own business. ii. proceeding to compute the arm's length price of such alleged international transaction without there being any reference from the learned AO to compute the arm's length price for any such transaction. iii. assuming that incurring of all such expenses automatically contributes to an enhancement of the brand value and creation of marketing intangibles thereby assuming that the legal owner of the brand has benefitted on account of incurring of such expenses, and without appreciating that any such alleged benefit to the AE at the most would be purely incidental in nature. iv. using an arbitrary and an unspecified method not prescribed in Rule 10B of the Income-t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said letter is placed at pages 96 and 97 of the paper book. The assessee also sought copy of reasons recorded for opening the assessment under section 147/148 of the Act. In reply the reasons were furnished to the assessee by the Assessing Officer vide letter dated 11-02-2011. The copy of the said letter and the reasons recorded for reopening the assessment are placed at pages 98 99 of the paper book. The reasons recorded for reopening the assessment read as under : M/s. Kimberly Clark Lever Pvt. Ltd. A.Y. 2007-08 In the case reference u/s.92CA(1) has been made to the TP office for the A.Y. 2007-08. The Jt.CIT(TP-1), Pune vide order u/s.92CA(3), dated 29/10/2010 has worked out adjustment in relation to international transactions of ₹ 12,17,43,370/-. In view of the same, as per the adjustment of ₹ 12,17,43,370/- to the total income, income chargeable to tax has escaped assessment within the meaning of section 147(c)(i) of the Income-tax Act, 1961. I have therefore reasons to believe that income of ₹ 12,17,43,370/- has escaped assessment for A.Y. 2007-08, on account of adjustment to International transactions carried out by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the reasons for reopening the assessment, i.e. initiating reassessment proceedings. It was stressed by the Ld. Authorised Representative for the assessee that there was no reason to believe that the income had escaped assessment and hence the initiation of the reassessment proceedings was bad in law and is to be quashed. Where the Assessing Officer had reopened the assessment by merely making a reference to the order of the Transfer Pricing Officer, which admittedly was passed without any jurisdiction, then there was no independent application of mind by the Assessing Officer to commence the reassessment proceedings and in the absence of the same, the assessment proceedings could not be re-opened. 8. We have heard the rival contentions and perused the record. The issue which arises in the present appeal is against the validity of the assessment proceedings initiated under section 147/148 of the Act. The facts of the present case are as in the facts before the Tribunal in the case of Maximize Learning Pvt. Ltd. Vs. ACIT (supra), i.e., the original return of income was filed in time and in both the cases the assessment proceedings relate to assessment year 2007- 08. Admittedly i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of assessment proceedings, which were not started. After going through the factual and legal aspects of the case, the Tribunal (supra) vide order dated 02.02.2015 (supra) had firstly held that the Assessing Officer was precluded for making a reference to the TPO under section 92CA(1) of the Act for the purpose of computing arm's length price in relation to the international transaction, when no assessment proceedings were pending in relation to the relevant assessment year. The relevant observations of the Tribunal (supra) are in paras 10 to 23, which read as under :- 10. The crux of the controversy revolves around the provisions of section 147/148 of the Act which empower 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 proceedings under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es to Maintenance and keeping of information and document by persons entering into an international transaction. Section 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 92F of the Act. Now, we may deal in slight detail the provisions of transfer pricing assessment which are relevant in the context of controversy before us. Section 92(1) of the Act mandates that any income arising from an international transaction shall be computed having regard to the arm's length price. Section 92C, inter-alia, prescribes the methods for computation of arm's length price in relation to an international transaction. Subsection (3) of section 92C of the Act empowers the Assessing Officer to determine the arm's length price in relation to an inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determined by the TPO, on a reference by the Assessing Officer. In the case before us, the total income of the assessee has been computed having regard to the arm's length price determined by the TPO under section 92CA(3) of the Act and therefore the Assessing Officer has taken recourse to section 92CA(4) of the Act. 15. It is quite clear that the process of determination of arm's length price is to be carried out during the course of assessment proceedings, may it be, under sub-section (3) of section 92C where 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, and determine the sum payable by him or refund on any amount due to him on the basis of such assessment. It is only in the course of such assessment of total income, that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2CA 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 international transaction is envisaged only in the course of the assessment proceedings, which is the only process known to the Act, whereby the assessment of total income is done. As per the CBDT (supra), the Assessing Officer may proceed to examine other aspects of the case during pendency of assessment proceedings but await the report of the TPO on the value of the international transactions before making assessment since the case would be selected for scrutiny before making reference to the TPO. 18. 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 pric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d-in-hand and without there being an occasion to compute income arising from an international transaction, it is difficult to comprehend the process for computation of arm's length price in relation to the relevant international transaction. Therefore, it would not be open for the Department to say that the process of computing arm's length price of an 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 selection of case for scrutiny. According to her, the recording of such satisfaction contemplated in the CBDT Instruction, would, inter-alia, envisage a reference to the TPO also. In our considered opinion, the reliance placed by the Ld. CIT-DR on the aforesaid CBDT Procedure for selection of cases for scrutiny, cannot distract from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 regard to its arm's length price; and, the occasion to compute the income would arise only when there is an on-going assessment proceeding. Therefore, reference made by the Ld. CIT-DR to the phraseology of section 92CA(1) without considering the entire schematic arrangement of sections 92 to 92F would be incorrect. 23. Therefore, we conclude this aspect by holding that the Assessing Officer is precluded from making a reference to the TPO u/s 92CA(1) of the Act for the purposes of computing arm's length price in relation to the international transaction when no assessment proceedings are pending in relation to the relevant assessment year. 10. 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 refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the matter became final on 30.09.2008 i.e. the date within which a notice u/s 143(2) of the Act was required to be issued, which was not done. The judgement of the Hon ble Punjab Haryana High Court 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 the proceedings for assessment stand terminated. To the similar effect is the ratio of the judgements of the Hon ble Madras High Court in the case of (i) CIT vs. M. Chellappan and Another, 281 ITR 444 (Madras); and, (ii) CIT vs. Deep Baruah, 329 ITR 362 (madras). 26. In this background, if on the date of making of reference to the TPO, the assessment proceedings u/s 143 of the Act had come to an end and the proceedings for assessment stood terminated, there was no occasion for the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urn of income was not picked up for a scrutiny assessment within the stipulated period, the only course for the Revenue was to issue notice u/s 148 of the Act on the ground that certain income chargeable to tax has escaped assessment. Secondly, it is pointed out that the return of income was filed by the assessee on 05.11.2007 with Circle 11(2), Pune whereas Form No.3CEB for the same assessment year was filed in Circle 1(1), Pune on 31.10.2007. It is only on 28.07.2009, Form No.3CE B was received by the present Assessing Officer i.e. Circle 1(1) wherein it was seen that assessee had entered into international transactions 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 as a nullity qua the belief entertained by the Assessing Officer that cert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Agarwalla Bros. (1991) 189 ITR 786 (Pat.); (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 of jurisdiction under Section 147 can be tested only by reference to the reasons recorded under Section 148(2) of the Act and the Assessing Officer is not authorized to refer to any other reason even if it can be otherwise inferred and/or gathered from the records. He is confined to the recorded reasons to support the assumption of jurisdiction. He cannot record only some of the reasons and keep the others up his sleeves to be disclosed before the Court if his action is ever challenged in a Court 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on ble High Court, a report submitted by the Valuation Officer in an invalid reference must be treated as a nullity in the eyes of law, nonest and void ab initio. According to the Hon ble High Court, where the reopening of assessment was based on such illegal, null and void report, the entire fabric for reopening of the assessment proceedings falls flat. In our considered opinion, the ratio of the judgement of the Hon ble Rajasthan High Court in the case of Brig B. Lal (supra) is squarely 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 that an order passed by the TPO can be a reason for re-assessment of income u/s 147/148 of the Act. The above proposition canvassed by the Ld. CIT-DR is not an absolute proposition, and the judgement of the Hon bl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 only point was whether order of the TPO passed u/s 92CA(3) of the Act for a subsequent assessment year could form a basis for the Assessing Officer to formulate a belief about the escapement of income in a preceding assessment year when the amended regime of Chapter X was not on the statute. The facts and circumstances in the present case are entirely different and therefore the judgement of the Punjab Haryana High Court in the case of M/s Coca Cola India Inc (supra) does not help the case 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 conseq ..... X X X X Extracts X X X X X X X X Extracts X X X X
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