2007 (7) TMI 50 - AT - Income Tax

For making adjustments u/s 92C(3)(a) to (d) AO need not required to demonstrate before the assessee - The provision of Sec 40A is not applicable here - Further tribunal decided upto the matter related to ARM S LENGTH PRICE and nature of amount paid as advance under lease agreement etc.

Summary

Issues Involved:
1. Requirement of Demonstrating Tax Avoidance
2. Requirement of Demonstrating Circumstances under Section 92C(3)
3. Requirement to Record Opinion/Reasons
4. Opportunity of Being Heard
5. Justiciability of Commissioner's Approval
6. Effect of Instruction No. 3 of 2003
7. Role of Assessing Officer Post-TPO Order

Detailed Analysis:

1. Requirement of Demonstrating Tax Avoidance
Issue: Whether it is a legal requirement under Chapter X of the Income-tax Act, 1961, that the Assessing Officer should prima facie demonstrate that there is tax avoidance before invoking the relevant provisions.

Analysis: The Tribunal held that the language of the statute is clear and unambiguous, and there is no requirement for the Assessing Officer to demonstrate tax avoidance before invoking the provisions of sections 92C and 92CA. The Tribunal emphasized that the plain meaning of the words used by the Legislature should be applied, and there is no need to refer to the Finance Minister's speech, Notes on Clauses, or Circulars when the language of the statute is clear. The Tribunal concluded that the provisions of Chapter X can be invoked without demonstrating tax avoidance.

Conclusion: The Tribunal answered this question in the negative, against the assessee and in favor of the Revenue.

2. Requirement of Demonstrating Circumstances under Section 92C(3)
Issue: Whether the Assessing Officer should prima facie demonstrate that any one or more of the circumstances set out in clauses (a) to (d) of section 92C(3) are satisfied before referring the case to the Transfer Pricing Officer (TPO).

Analysis: The Tribunal held that the provisions of sections 92C and 92CA are independent of each other. The Assessing Officer is not required to demonstrate the existence of circumstances under section 92C(3) before referring the case to the TPO. The Tribunal emphasized that the only requirement under section 92CA is that the Assessing Officer considers it necessary or expedient to refer the matter to the TPO.

Conclusion: The Tribunal answered this question in the negative, in favor of the Revenue and against the assessee.

3. Requirement to Record Opinion/Reasons
Issue: Whether the Assessing Officer is required to record his opinion/reason before seeking the previous approval of the Commissioner under section 92CA(1).

Analysis: The Tribunal held that there is no requirement in section 92CA for the Assessing Officer to record reasons before making a reference to the TPO. The Tribunal emphasized that the Assessing Officer should have some material to justify the reference to the TPO, but the law does not mandate recording reasons or providing an opportunity to the assessee before making such a reference.

Conclusion: The Tribunal answered this question against the assessee.

4. Opportunity of Being Heard
Issue: Whether it is a condition precedent that the Assessing Officer shall provide to the assessee an opportunity of being heard before making a reference to the TPO.

Analysis: The Tribunal held that there is no requirement to provide an opportunity of being heard to the assessee before making a reference to the TPO. The Tribunal emphasized that the reference is a step in the collection of material and does not result in civil consequences for the assessee.

Conclusion: The Tribunal answered this question against the assessee.

5. Justiciability of Commissioner's Approval
Issue: Whether the approval granted by the Commissioner under section 92CA(1) is justiciable and can be called in question in appeal.

Analysis: The Tribunal held that the approval of the Commissioner is an internal matter of the Department and does not decide the rights of the assessee. Therefore, an opportunity by such authority is not required. However, the Tribunal noted that the approval should not be granted mechanically and should involve the application of mind by the Commissioner.

Conclusion: The Tribunal answered this question against the assessee.

6. Effect of Instruction No. 3 of 2003
Issue: What is the legal effect of Instruction No. 3 of 2003 issued by the Central Board of Direct Taxes on transfer pricing matters.

Analysis: The Tribunal held that the Instruction No. 3 of 2003 is binding on the Assessing Officer and the Commissioner. The instruction mandates that cases where the aggregate value of international transactions exceeds Rs. 5 crores should be referred to the TPO. The Tribunal upheld the validity of the instruction and noted that it aims to avoid arbitrariness in the application of transfer pricing provisions.

Conclusion: The Tribunal answered this question against the assessee.

7. Role of Assessing Officer Post-TPO Order
Issue: What is the role of the Assessing Officer after receipt of the order passed by the TPO under section 92CA(3).

Analysis: The Tribunal held that the order of the TPO is not binding on the Assessing Officer. The Assessing Officer is required to consider the TPO's order along with any other material placed before him by the assessee. The Tribunal emphasized that the Assessing Officer should adopt the transfer pricing determined by the TPO unless there are strong reasons to modify it.

Conclusion: The Tribunal answered this question by holding that the TPO's order is not binding on the Assessing Officer.

Additional Analysis:
Transfer Pricing Determination: The Tribunal found that the taxpayer did not furnish a proper arm's length price and the TPO's determination of the arm's length price was also flawed. The Tribunal set aside the order of the Commissioner of Income-tax (Appeals) and directed the Assessing Officer to refer the matter back to the TPO for fresh determination of the arm's length price.

Disallowance of Lease Termination Payment: The Tribunal upheld the disallowance of Rs. 1 crore paid for the termination of the lease agreement as a capital expenditure.

Procedural Fairness: The Tribunal noted that both parties were given ample opportunity to present their case, and the matter was remanded for fresh determination of the arm's length price in accordance with the law.

Interest Under Sections 234A and 234B: The Tribunal directed the Assessing Officer to examine the issue of interest under sections 234A and 234B at the time of fresh assessment.

Outcome: Both appeals were allowed for statistical purposes, and the matter was remanded for fresh determination of the arm's length price and reassessment.