Recent instruction of CBDT purportedly issued in compliance of directions of the Supreme Court in the case of Bharati Cellular Ltd regarding examining technical experts – reissue of fully proper instructions is desirable.

[C.A. DEV KUMAR KOTHARI]

Relevant links and references: 

Commissioner of Income-tax Versus Bharti Cellular Ltd. & other 2011 -TMI - 202748 - Supreme Court of India   Other Citation: [2011] 330 ITR 0239

INSTRUCTION No. 5/2011 [F.No. 225/61/2011-IT(A-II)], dated 30-3-2011 

National Standards of CCS No. 7 issued by Telecom Engineering Centre-

 http://www.itu-apt.org/ngnrm/rrmittar4.pdf 

Observations of the Supreme Court  in Case of Bharati Cellular:

In an order dated 12.08.2010  the Hon’ble Supreme Court has made the following observations in the case of CIT, Delhi v. Bharti Cellular Ltd (Supra.) (with highlights added by author for anlaysis): 

                "We are directing CBDT to issue directions to all its Officers that in such cases, the Department need not proceed only by the contracts placed before the officers. With the emergence of our country as one of the BRIC countries and with the technological advancement matters such as present one will keep on recurring and hence time has come when Department should examine technical experts so that the matters could be disposed of expeditiously and further it would enable the appellate Forums, including this Court, to decide legal issues based on the factual foundation. We do not know the constraints of the Department but time has come when the Department should understand that when the case involves revenue running into crores, technical evidence would help the Tribunals and courts to decide matters expeditiously based on factual foundation."

An analysis of observations of the Supreme Court:

              Department need not proceed only by the contracts placed before the officers.

              Department should examine technical experts ,

              The aim is that the matters could be disposed of expeditiously , and to enable the appellate Forums, including the Supreme  Court, to decide legal issues based on the factual foundation. 

             Then the Court observed that we do not know the constraints of the Department but time has come when the Department should understand that when the case involves revenue running into crores, technical evidence would help the Tribunals and courts to decide matters expeditiously based on factual foundation. 

If we read the above instructions carefully, we find that the Supreme Court  has directed that the department should examine technical experts.

 

Meaning of instructions:

The above instruction means  that the departmental authorities should examine technical experts or their reports etc. There seems nothing in the instruction as to appointment of technical experts by the department. 

The clear and possible view is that the department should ask the assessee to produce technical experts and/or their report for ascertaining the factual aspects where technical issues are involved and have a bearing on assessment of tax. 

This view is also logical because when an assessee has entered into a highly complex technical business, or set up a complex technical activity, he has made preliminary enquiries, obtained technical reports, engaged technical experts, and therefore assessee is in a position to provide evidences in form of technical reports and in case of need can produce technical experts for examination and explanations before tax authorities. 

However, on reading of the instructions, it appears that the Board has considered this as if the department should appoint independent technical experts and obtain their report and then provide reasonable opportunity to assessee to explain the same and give his comments etc. 

CBDT’S Order-Instruction - 

Income Tax:

In terms of the above instructions of the Supreme Court, the CBDT has issued 

instruction 5/2011 [F.No. 225/61/2011-IT(A-II)],

Taking opinion of technical experts and bringing on record technical evidence in cases involving complex issues of technical nature and substantial revenue - Directions of the Hon’ble Supreme Court

dated 30-3-2011. The instruction reads as follows:

INSTRUCTION No. 5/2011 [F.No. 225/61/2011-IT(A-II)], dated 30-3-2011

The first paragraph of the Circualr is about directions of the Supreme Court wherein the directions have been reprodueced. As t in this wirteup that direction is discussed in beginning the same is not reproduced for sake of brevity. The second para reads as follows (with highlights provided by author for analysis).

            2. The above directions of the Supreme Court may be brought to the notice of all the officers in your region. In view of these directions in all cases that are taken up for scrutiny, the Assessing Officers/Transfer Pricing Officers should frame assessments only after bringing on record appropriate technical evidence that may be required in a case. The process of identification of such cases and initiation of the proceedings to obtain the technical evidence should be taken up well in advance before the date of limitation. The Officer concerned shall bring such cases to the notice of the CCIT/DGIT concerned, who will look into the complexities of the technical issues and monitor the progress of the case and if required assist in obtaining the opinion of the technical experts in the relevant field of expertise and endeavour to arrange for the opinion of the concerned technical expert well within time. Further, the evidence so gathered shall be made available to the assessee and reasonable opportunity provided before the assessment order is passed.

3. After a reference is made to an expert in the above manner, intimation must be sent of the Board through Member (IT) in the following proforma:

Name of case and Assessment year

Brief description of the technical issue involved

Name and address of the expert

Tax effec

 

An analysis of instruction:

As per this instruction the department shall appoint experts  and obtain opinion of concerned technical experts which shall also be made available to the concerned assessee and reasonable opportunity is to be provided to the assessee. A report in the proforma provided in instruction is to be furnished to the Board. 

Whereas, as observed by the author earlier, as per directions of the Board, the AO should examine technical experts- means technical experts and their reports as may be submitted by the assessee. 

Therefore, in opinion of the author the instruction issued by the Board is not in terms of the Directions of the Supreme Court. 

Missing aspects in instructions: 

Even if assume that the Supreme court has directed the department to gather technical evidences ( it can be so presumed as per observation of the Supreme Court about Resources available with Department) then we find that the Instruction is incomplete. The instruction should also contain guidance about:

1. Monetary limits of revenue involvement where technical experts should be called for,
2. Nature of technical issues in which such reports should be called for,
3. What if the assessee has provided technical reports- whether department should obtain separate report, if yes , the circumstances when such exercise is needed,
4. Registration, / recognition / empanelment of experts,
5. Independence of experts- they should not be influenced by revenue and assessee.
6. Fees payable to experts and who will bear the same. Naturally the revenue should bear the cost for obtaining such reports.  

In view of the above discussion author feels that the Board need to reconsider its instructions and can come out with new instructions about: 

1. Circumstances in which assessee should be called to lead technical evidences,
2. Monetary limits of revenue involvement where technical experts should be called for – from assessee and in cases where independent experts can be appointed by revenue.
3. Nature of technical issues in which such reports should be called for,
4. What if the assessee has provided technical reports- whether department should obtain separate report, if yes , the circumstances when such exercise is needed,

Registration, / recognition / empanelment of experts – to be appointed by revenue and in such cases their independence ,fees payable to experts and who will bear the same. Naturally the revenue should bear the cost for obtaining such reports if it want to increase its revenue.