TMI Blog2008 (12) TMI 67X X X X Extracts X X X X X X X X Extracts X X X X ..... etitioner is a company incorporated under the laws of United States of America and is, thus, a foreign company under Section 2(23A) of the Act. It has a Branch office in India. It is a part of International Coca Cola corporate group. The said group has other companies operating in India incorporated under the Companies Act, 1956. 3. The petitioner obtained permission under Section 29(1)(a) of the Foreign Exchange Regulation Act, 1973 (FERA) to operate a Branch office in India to render services to Coca Cola Group companies, as per conditions mentioned in the application for the said permission. There is a service agreement between the petitioner on the one hand and Britco Foods Company Private Limited (Britco) on the other. As per the said agreement, the petitioner provides advisory services to Britco to advise, monitor and coordinate the activities of bottlers, in consideration of which the petitioner receives fee calculated on the basis of actual cost plus 5%. The petitioner was assessed under the Act for the assessment year 1998-99 on 31.3.2004. The Assessing Officer, however, formed an opinion that income of the petitioner, chargeable to tax for the said year, had escaped a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment year 2006-07 was granted. The petitioner has further amended the petition to challenge the notice in respect of assessment year 2006-07, which amendment has been allowed by a separate order. 6. Main contention raised in the writ petition is that provisions of Chapter X i.e. Sections 92 to 92F of the Act have been enacted with a view to prevent diversion of profits in intra-group transactions leading to erosion of tax revenue. The said provisions have been incorporated vide Finance Act, 2001 and further amended vide Finance Act, 2002. Having regard to the object for which provisions have been enacted, applicability of the said provisions has to be limited to situations where there is diversion of profits out of India or where there may be erosion of tax revenue in intra group transaction. In the present case, there is neither any material to show diversion of profits outside India nor of erosion of tax revenue. If the price charged was less and profit of the petitioner was less, there was corresponding lesser claim for deduction by Britco. Question of diversion of profits out of India would arise only if price charged is higher and that too if the higher profit is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the petitioner? (ii) Whether order passed by Transfer Pricing Officer under Chapter X after 1.4.2002 could be one of the reasons for reassessment for period prior to introduction of amended Chapter X in the Act? (iii) Whether provisions of Chapter X are attracted when both the parties to a transaction are subject to tax in India, in absence of allegation of transfer of profits out of India or evasion of tax?" (iv) Whether opportunity of being heard is required before referring the matter of determination of arm's length price to Transfer Pricing Officer?" 11. Before we consider the above questions, it will be appropriate to reproduce the relevant statutory provisions of Section 92 (unamended), Section 147, Section 92 (amended) to Section 92F (amended). Section 92 (unamended):- "Where a business is carried on between a resident and a non-resident and it appears to the Assessing Officer that, owing to the close connection between them, the course of business is so arranged that the business transacted between them produces to the resident either no profits or less than the ordinary profits which might be expected to arise in that business, the Assessing Officer shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urn; (c) Where an assessment has been made, but - (i) Income chargeable to tax has been underassessed; or (ii) Such income has been assessed at too low a rate; or (iii) Such income has been made the subject of excessive relief under this Act; or (iv) Excessive loss or depreciation allowance or any other allowance under this Act has been computed." Section 92 to 92F:- "92. (1) Any income arising from an international transaction shall be computed having regard to the arm's length price. Explanation.— For the removal of doubts, it is hereby clarified that the allowance for any expense or interest arising from an international transaction shall also be determined having regard to the arm's length price. (2) Where in an international transaction, two or more associated enterprises enter into a mutual agreement or arrangement for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises, the cost or expense allocated or apportioned to, or, as the case may be, contributed by, any such enterprise shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r one or more of the executive directors or members of the governing board, of each of the two enterprises are appointed by the same person or persons; or (g) the manufacture or processing of goods or articles or business carried out by one enterprise is wholly dependent on the use of know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights; or (h) ninety per cent or more of the raw materials and consumables required 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 enterprise; 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch other relevant factors as the Board may prescribe, namely :— (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board. (2) The most appropriate method referred to in subsection (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed : Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean. (3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that— (a) the price charged or paid in an international transaction has not been determined in accordance with sub-sections (1) and (2); or (b) any information and document relating to an international transaction have not been kept and m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansfer Pricing Officer shall serve a notice on the assessee requiring him to produce or cause to be produced on a date to be specified therein, any evidence on which the assessee may rely in support of the computation made by him of the arms length price in relation to the international transaction referred to in sub-section (1). (3) On the date specified in the notice under sub-section (2), or as soon thereafter as may be, after hearing such evidence as the assessee may produce, including any information or documents referred to in sub-section (3) of section 92D and after considering such evidence as the Transfer Pricing Officer may require on any specified points and after taking into account all relevant materials which he has gathered, the Transfer Pricing Officer shall, by order in writing, determine the arms length price in relation to the international transaction in accordance with sub-section (3) of section 92C and send a copy of his order to the Assessing Officer and to the assessee. (3A) Where a reference was made under sub-section (1) before the 1 st day of June, 2007 but the order under subsection (3) has not been made by the Transfer Pricing Officer before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hin a period of thirty days from the date of receipt of a notice issued in this regard : Provided that the Assessing Officer or the Commissioner (Appeals) may, on an application made by such person, extend the period of thirty days by a further period not exceeding thirty days. 92E. Every person who has entered into an international transaction during a previous year shall obtain a report from an accountant and furnish such report on or before the specified date in the prescribed form duly signed and verified in the prescribed manner by such accountant and setting forth such particulars as may be prescribed. 92F. In sections 92, 92A, 92B, 92C, 92D and 92E, unless the context otherwise requires, (i) accountant shall have the same meaning as in the Explanation below sub-section (2) of section 288; (ii) arms length price means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions; (iii) enterprise means a person (including a permanent establishment of such person) who is, or has been, or is proposed to be, engaged in any activity, relating to the production, storage, supply, dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1]248 ITR (St.) 1, 181):- "The increasing participation of multinational groups in economic activities in the country has given rise to new and complex issues emerging from transactions entered into between two or more enterprises belonging to the same multinational group. The profits derived by such enterprises carrying on business in India can be controlled by the multinational groups by manipulating the prices charged and paid in such intra-group; transactions, thereby, leading to erosion of tax revenues. With a view to provide a statutory framework which can lead to computation of reasonable, fair and equitable profits and tax in India, in the case of such multinational enterprises, new provisions are proposed to be introduced in the Income-tax Act. These provisions relating to computation of income from international transactions having regard to arm's length price, meaning of associated enterprise, meaning of international transaction, determination of arm's length price, keeping and maintaining of information and documents by persons entering into international transactions, furnishing of a report from an accountant by persons entering into such transactions and definiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in accordance with sub-sections (1) and (2) or information and documents relating to the international transaction have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 29D, and the rules made in this behalf or the information or data used in computation of the arms' length price is not reliable or correct or the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D, the Assessing Officer may proceed to determine, after giving an opportunity of being heard to the assessee, the arm's length price in relation to the said transaction in accordance with the sub-sections (1) and (2) of this section, on the basis of such material or information or documents available with him. The new section 92D seeks to provide that every person who has entered into an international transaction shall keep and maintain such information and documents as may be specified by rules by the Central Board of Direct Taxes. The Central Board of Direct Taxes may also specify by the rules the period for which the informat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e context of the objects as manifested in the Statement of Objects and Reasons, the Finance Minister's speech and the Circular. Reliance has been placed on judgments of the Hon'ble Supreme Court in K.P. Varghese v. I.T.O. (1981) 131 ITR 597; [1981] 4 SCC 173; AIR 1981 SC 1922, Commissioner of Income Tax (Central) v. B.N. Bhattacharjee [1979] 118 ITR 461; (1979) 4 SCC 121, Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd. (1987) 1 SCC 424, DIT (International Taxation), Mumbai v. Morgan Stanley Co. Inc. [2007] 292 ITR 416; (2007) 7 SCC 1 and judgment of Delhi High Court in Sony India P. Ltd. v. Central Board of Direct Taxes (2007) 288 ITR 52 and judgment of Bombay High Court in SGS India Pvt. Ltd. v. Assistant Commissioner of Income-tax [2007] 292 ITR 93 Writ Petition No.3166 of 2006. Learned counsel also submits that the view taken in K.P. Varghese [1981] 131 ITR 597 (SC) has been followed in B.R. Enterprises v. State of U.P. (1999) 9 SCC 700; [2000] 120 STC 302, Commissioner of Income Tax, Bombay and others v. Mahindra and Mahindra Limited [1983] 144 ITR 225; (1993) 4 SCC 392 and Raipur Development Authority v. Anupam Sah ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the statutory scheme of the Act. Material contained in the order of Transfer Pricing Officer was a relevant material which could be taken into account for formation of opinion for escapement of income. Apart from the said material, the Assessing Officer has also taken into account other material and at this stage, notice under Section 148 of the Act could not be interfered with unless it could be held that the reasons given in the notice were irrelevant or absurd and had no nexus with the opinion of escapement of income. 21. As regards contention against applicability of provisions of Chapter X, it was submitted that the provisions are clearly attracted to situations enumerated therein, namely there being international transaction as defined in Section 92B of the Act i.e. a transaction between two or more associated enterprises either or both of whom were non-resident in situations specified therein. The applicability of the said provisions could not be controlled by reference to Statement of Objects and Reasons or Finance Minister's speech which could be referred to only for the purpose of ascertaining the history and object of the provisions and for not controlling their me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gislature to deal with apparently overlapping situations by different provisions. 25. Though Article 14 of the Constitution applies even to a taxing Statute, it does not prevent Legislature from making classification having intelligible differentia and nexus with the object of classification. 26. Principles of interpretation are applied to ascertain the intention of the Legislature and though they are considered to be good servants, they are bad masters. Intention of Legislature is best understood from the language used, which is the golden rule of interpretation. Only when there is ambiguity or absurdity, external aids may be pressed into service. Statement of objects and reasons or the speech of the Finance Minister may be referred to, to ascertain the history and object, but cannot control meaning of a provision when language is clear and free from ambiguity. 27. Reference may be made to leading decisions of the Hon'ble Supreme court on the above mentioned settled propositions. 28. In Navinchandra Mafatlal v. CIT , (1954) 26 ITR 758 (SC); AIR 1955 SC 58 dealing with the issue of interpretation of word "income" in the legislative entry, it was observed (page 76 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the legislature in enacting the section exceeded the limits of the legislative field prescribed by the present Entry 82 in List I? As we have already noticed, the word "income" in the context must receive a wide interpretation; how wide it should be it is unnecessary to consider, because such an enquiry would be hypothetical. The question must be decided on the facts of each case. There must no doubt be some rational connection between the item taxed and the concept of income liberally construed. If the legislature realises that the private controlled companies generally adopt the device of making advances or giving loans to their shareholders with the object of evading the payment of tax, it can step in to meet this mischief, and in that connection, it has created a fiction by which the amount ostensibly and nominally advanced to a shareholder as a loan is treated in reality for tax purposes as the payment of dividend to him. We have already explained how a small number of shareholders controlling a private company adopt this device. Having regard to the fact that the legislature was aware of such devices, would it not be competent to the legislature to devise a fiction for treati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which, with their general tendency to "give the tax payer the breaks", are out of place where the legislation has a fiscal mission. Indeed, taxation has ceased to be regarded as an "impertinent intrusion into the sacred rights of private property" and it is now increasingly regarded as a potent fiscal tool of State policy to strike the required balance-required in the context of the felt needs of the times-between citizen's claim to enjoyment of his property on the one hand and the need for an equitable distribution of the burdens of the community to sustain social services and purposes on the other. These words of Thomas M. Cooley in Law of Taxation, Vol. 2 are worth mentioning: "Artificial rules of construction have probably found more favour with the courts than they have ever deserved. Their application in legal controversies has oftentimes been pushed to an extreme which has defeated the plain and manifest purpose in enacting the laws. Penal laws have sometimes had all their meaning construed away and in remedial laws, remedies have been found which the legislature never intended to give. Something akin to this has befallen the revenue laws.... (emphasis supplied) 27…….T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not placed before the High Court which would have assisted the High Court in arriving at the right conclusion as to the reasonableness of the restriction imposed. State of West Bengal v. Union of India, (1964) 1 SCR 371, 431-32 approved the use of Statement of Objects and Reasons for the purpose of understanding the background and the antecedent state of affairs leading up to the legislation. 70. In Quareshi-I itself, which has been very strongly relied upon by the learned counsel for the respondents before us, Chief Justice S.R. Das has held :- "Pronouncements of this Court further establish, amongst other things, that there is always a presumption in favour of the constitutionality of an enactment and that the burden is upon him, who attacks it, to show that there has been a clear violation of the constitutional principles. The Courts, it is accepted, must presume that the legislature understands and correctly ] appreciates the needs of its own people, that its laws are directed to problems made manifest by experience and that its discriminations are based on adequate grounds. It must be borne in mind that the legislature is free to recognise degrees of harm and may conf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s." 34. Reference may also be made to Section 64 of the Act which provides for clubbing the income of a spouse or a child to the income of an assessee. 35. In Aswini Kumar Ghose v. Arabinda Bose, AIR 1952 SC 369, it was observed (page 378):- "32. As regards the propriety of the reference to the Statement of objects and reasons, it must be remembered that it seeks only to explain what reasons induced the mover to introduce the Bill in the House and what objects he sought to achieve. But those objects and reasons may or may not correspond to the, objective which the majority of members had in view when they passed it into law. The Bill may have undergone radical changes during its passage through the House or Houses, and there is no guarantee that the reasons which led to its introduction and the objects thereby sought to be achieved have remained the same throughout till the Bill emerges form the House as an Act of the Legislature, for they do not form part of the Bill and are not voted upon by the members. We, therefore, consider that the Statement of objects and reasons appended to the Bill should be ruled out as an aid to the construction of a statute." 36. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... impermissible is an interpretation which does not follow from the plain, unambiguous language of the statute. Words cannot be added to or substituted so as to give a meaning to the statute which will serve the spirit and intention of the legislature….. 12. In the case of Bank of Chettinad Ltd. v. CIT [1940] 8 ITR 522; (AIR 1940 PC 183), the Privy Council quoted with approval the following passage from the opinion of Lord Russel of Killowen in Inland Revenue Commissioners v. Duke of Westminster , (1936) AC 1 : "I confess that I view with disfavour the doctrine that in taxation cases the subject is to be taxed if in accordance with a Court's view of what it considers the substance of the transaction, the Court thinks that the case falls within the contemplation or spirit of the statute. The subject is not taxable by inference or by analogy, but only by the plain words of a statute applicable to the facts and circumstances of his case. As Lord Cairns said many years ago in (1869) 4 HL 100 (2) at page 122 : "As I understand the principle of all fiscal legislation it is this" If the person sought to be taxed comes within the letter of the law he must be taxed, however great ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be avoided……" 43. The above observations do not show any departure from the rule of interpretation according to the words used except where there is ambiguity or absurdity. 44. There is, thus, no departure from the settled principle that primary rule of construction is the language used and in case of ambiguity or absurdity, meaning consistent with object and purpose of a statute has to be assigned without doing violence to the statute. Statement of objects can be referred to find out the history and object of the statute and does not control the interpretation when language is clear. We are unable to read the judgments relied upon to the contrary. 45. We now deal with questions framed in para 10 above. Re:Q.No.(i) 46. Objection of learned counsel for petitioner, as already mentioned above, is two fold: (a) Reference to Inapplicable provision of Section 92 of the Act as it stood prior to amendment w.e.f. 1.4.2002 and (b) irrelevance of order of the Transfer Pricing Officer under Chapter X passed in respect of a subsequent assessment year. 47. We have already reproduced Section 147 of the Act above and its applicability requires formation of opinion th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, it follows that an Income-tax Officer acquires jurisdiction to reopen assessment under Section 147(a) read with S. 148 of the Income-tax Act, 1961 only if on the basis of specific, reliable and relevant information coming to his possession subsequently, he has reasons which he must record, to believe that by reason of omission or failure on the part of the assessee to make a true and full disclosure of all material facts necessary for his assessment during the concluded assessment proceedings, any part of his income, profit or gains chargeable to income-tax has escaped assessment. He may start reassessment proceedings either because some fresh facts come to light which were not previously disclosed or some information with regard to the facts previously disclosed comes into his possession which tends to expose the untruthfulness of those facts. In such situations, it is not a case of mere change of opinion or the drawing of a different inference from the same facts as were earlier available but acting on fresh information. Since, the belief is that of the Income-tax Officer, the sufficiency of reasons for forming the belief, is not for the Court to judge but it is open to an ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, it cannot be held that the notice proposing reassessment is vitiated merely because one of the reasons referred to order of Transfer Pricing Officer. Re:Q.No.(iii) 52. We have already reproduced the amended provisions of Chapter X. According to the petitioner, the same should be held to be inapplicable, as making the same applicable will render them unconstitutional. The petitioner has not challenged their validity. We do not find any substance in the submission that if the said provisions are made applicable to the petitioner, the same would be unconstitutional. There is no lack of Legislative competence for enacting the said provisions and making them applicable to the petitioner or to a class of persons falling in the category of the petitioner. Potential of multinational companies to allocate profits in intra groups transactions to outside jurisdiction or resulting in tax evasion is an acknowledged fact and is duly recognized in Legislation, not only in India but elsewhere also. Keeping in view this mischief to be remedied and to advance the object of taxing the real income, provisions have been enacted. The amended provisions certainly advance the declared object b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmal price. There is always a possibility of transaction between a non resident and its associates being under-valued and having regard to such tendency, a provision that income arising out of said transaction could be computed having regard to arm's length price, will not be open to question and is within the legislative competence to effectuate the charge of taxing real income in India. 54. We, thus, do find any merit whatsoever in the contention that provisions of Chapter X cannot be made applicable to parties which are subject to jurisdiction of taxing authorities in India, without there being any material to show transfer of profits outside India or evasion of tax between the two parties. The contention that according to the permission granted by the Reserve Bank of India under the FERA, the assessee cannot charge more than particular price, can also not control the provisions of the Act, which provides for taxing the income as per the said provision or computation of income, having regard to arm's length price in any international transaction, as defined. 55. The judgment on interpretation of Statutes in K.P. Varghese (supra), does not in any manner help the petit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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