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TMI Blog2015 (2) TMI 662X X X X Extracts X X X X X X X X Extracts X X X X ..... tiny proceedings were started within the period stipulated in law. The aforesaid position is also reinforced by the CBDT Circular No.549 dated 31.10.1989. As per the CBDT, if, after furnishing return of income, an assessee does not receive a notice u/s 143(2) of the Act from the Department within period stipulated in the proviso to section 143(2) of the Act, it follows that the return filed by the assessee has become final and no scrutiny proceedings should be started in respect of that return. 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 to have made a reference to the TPO for determination of arm s length price of the international transactions in terms of section 92CA of the Act. We have already inferred in the earlier paras that under the provisions of section 92CA of the Act, a reference to the TPO for computation of arm s length price in relation to international transactions is permissible only in the course of the assessment proceedings. Thus it has to be inferred that when the Assessing Officer made refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned DRP erred in law and on the facts and in circumstances of the case in making an adjustment amounting to ₹ 17,570,070/- to the value of international transactions entered into by the Appellant with its Associated Enterprise in respect of provision of Information Technology Enabled Services ("ITES"). 3. Inappropriate calculation of operating margin of comparable companies 3.1 The learned ACIT pursuant to the directions of the learned DRP erred in calculating the average operating margin of comparable companies. 4. Inappropriate calculation of working capital adjustment 4.1 The learned ACIT pursuant to the directions of the learned DRP erred in law and on the facts and in calculating the working capital adjustment considering the sales as basis for calculation against correct base of operating cost. 4.2 While granting the working capital adjustment, the learned ACIT pursuant to the directions of the learned DRP erred in law and on the facts and in circumstances of the case in not considering the inventory as a part of working capital of Pentamedia Graphics Limited 5. Erroneous selection of comparable companies 5.1 The learned ACIT pursuant to the directions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 05.11.2007 declaring a total income of ₹ 2,15,31,701/-. The said return of income was duly processed u/s 143(1) of the Act. The said return was not picked-up for scrutiny assessment because no notice u/s 143(2) of the Act was issued by the Assessing Officer within the period prescribed in clause (ii) of sub-section (2) of section 143 of the Act, as it stood at the relevant point of time. On 14.01.2011, the Assessing Officer recorded reasons in terms of section 147 of the Act and formulated a belief that certain income chargeable to tax had escaped assessment for the year under consideration and accordingly he issued a notice u/s 148 of the Act of even date calling for a return of income. In the subsequent assessment made u/s 143(3) r.w.s. 147 and 144C(13) of the Act dated 28.09.2012, Assessing Officer determined the total income at ₹ 3,91,01,770/-, which inter-alia, included an addition of ₹ 1,75,70,070/- on account of arm's length price of the international transaction of Provision of IT enabled services to associate enterprise abroad. The aforesaid addition was made by the Assessing Officer in conformity with the arm's length price determined by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment relating to the adjustment of ₹ 2,49,43,811/- to the total income. In nutshell, the Assessing Officer has formed a belief about escapement of income based on the order of the TPO u/s 92CA(3) computing adjustment in relation to the international transactions of the assessee with its associated enterprises. 6. In the above background, now we may briefly record the contentions of the assessee challenging the validity of the proceedings initiated by issuance of notice u/s 148 of the Act and the defense mounted by the learned CIT-DR to support the initiation of proceedings. The learned counsel for the assessee firstly contended that the recourse to sections 147/148 of the Act in order to reopen the assessment is merely to circumvent the situation which arose from the fact that originally no notice was issued u/s 143(2) of the Act within the period prescribed. According to him, the requisite notice u/s 143(2) of the Act in order to frame a scrutiny assessment u/s 143(3) of the Act was to be issued upto 30.09.2008, which in the present case has not been done. Hence, the impugned reopening of assessment by issuance of notice u/s 148 of the Act is clearly to achieve the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act, which prescribe that the Assessing Officer has to have a 'reason to believe' that certain income chargeable to tax had escaped assessment. It is contended that in the instant case, the belief that any income of the assessee has escaped assessment is clearly not that of the Assessing Officer but it is that of the TPO and hence the impugned reasons recorded are contrary to the requirements of section 147 of the Act and deserve to be struck down. 9. Lastly, it is contended that the reasons recorded are without any application of mind by the Assessing Officer and on this count also the reopening of the assessment has to fail. In this context, it was sought to be pointed out that in the reasons recorded, Assessing Officer has referred to section 147(C)(1) of the Act, which is wrong, but assuming that the Assessing Officer had Explanation 2(c) to section 147 of the Act in his mind, then also it is a wrong assertion because the said Explanation applies "where an assessment has been made", whereas in the present case, no assessment was hitherto made for the year under consideration as the income tax return filed by the assessee was only subject to a processing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -upon the relevant provisions relating to the transfer pricing assessment which are contained in sections 92 to 92F of the Act under Chapter - X relating to the "Special Provisions Relating To Avoidance Of Tax". Sections 92 to 92F of the Act were introduced by the Finance Act, 2001 and are effective from the assessment year 2002-03. Section 92(1) of the Act provides that any income arising from an international transaction between associated enterprises shall be computed having regard to the arm's length price. Sections 92A and 92B of the Act contain provisions relating to the meaning of the expressions "associated enterprise" and "international transaction" respectively. Section 92C of the Act contains the powers of the Assessing Officer and the manner of determination of arm's length price in relation to an international transaction. Section 92CA of the Act provides that where the Assessing Officer considers it necessary or expedient to do so, he may refer to the Transfer Pricing Officer the determination of the arm's length price. Section 92CB of the Act relates to the power of the Board to make safe harbour rules. Section 92D of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o him, is done by the TPO under sub-section (3) of section 92CA but the computation of total income having regard to the arm's length price so determined by the TPO is required to be done by the Assessing Officer under sub-section (4) of section 92C, read with sub-section (4) of section 92CA. 14. In sum and substance, the scheme of the Act postulates that arm's length price in relation to an international transaction is determined either by the Assessing Officer as provided in sub-section (3) of section 92C or by the TPO u/s 92CA(3) of the Act where a reference is made to him by the Assessing Officer. In both situations, the Assessing Officer is required to compute the total income of the assessee having regard to the arm's length price of the international transaction so determined, either in terms of sub-section (4) of section 92C or sub-section (4) of section 92CA. Notably, sub-section (4) of section 92C comes into play where an arm's length price in relation to the international transaction is determined by the Assessing Officer and sub-section (4) of section 92CA comes into play where the arm's length price in relation to an international transaction is de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re are more than one transaction with an associated enterprise or there are transactions with more than one associated enterprises the aggregate value of which exceeds ₹ 5 crores, the transactions should be referred to the TPO. Before making reference to the TPO, the Assessing Officer has to seek approval of the Commissioner/Director as contemplated under the Act. Under the provisions of section 92CA reference is in relation to the international transaction. Hence all transactions have to be explicitly mentioned in the letter of reference. Since the case will be selected for scrutiny before making reference to the TPO, 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 international transaction before making final assessment." [underlined for emphasis by us] 17. It is emphasized on the basis of the CBDT Instruction (supra) that even as per the understanding of the CBDT, a case is to be selected for scrutiny assessment before the Assessing Officer may refer the computation of arm's length price in relation to an international transaction to the TPO u/s 92CA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DR, could very well be the reference of the matter of the TPO, therefore, the stipulated period laid down by the CBDT does not pre-suppose that the issue of notice u/s 143(2) of the Act has to be necessarily and without fail precede the reference to TPO. 19. We have carefully considered the plea of the Ld. CIT-DR, that it is open to the Department to make a reference to the TPO without issuing notice u/s 143(2) of the Act, but in our view, it is not supported by a schematic reading of the relevant Provisions relating to the transfer pricing assessment contained in sections 92 to 92F. The entire purpose of computation of arm's length price in relation to an international transaction is found in sub-section (1) of section 92 of the Act. Section 92(1) mandates that any income arising from an international transaction shall be computed having regard to the arm's length price. Therefore, the sole aim of computing the arm's length price in relation to any international transaction is to compute the income arising therefrom. Thus, the computation of income and the determination of arm's length price in relation to the international transaction have to go hand-in-hand and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter to the TPO under approval of the Commissioner. If both the conditions are satisfied there is no bar or requirement of any assessment proceedings being pending, before the reference is made to the TPO. 22. The aforesaid plea of the Ld. CIT-DR also, in our view, fails to take into consideration the entire scheme envisaged for the transfer pricing assessment in sections 92 to 92F of the Act. The provisions of sections 92 to 92F of the relate to computation of income from the international transaction having regard to the arm's length price, meaning of associated enterprises, 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 transaction and the definition of certain expressions occurring in such sections. The aforesaid provisions do not operate in individual spheres but the same operate with a singular purpose of computing income arising from an international transaction. The process of computation of income is necessarily a part and parcel of the assessment proceedings env ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome filed by the assessee on 05.11.2007 became final as no scrutiny proceedings were started within the period stipulated in law. The aforesaid position is also reinforced by the CBDT Circular No.549 dated 31.10.1989. As per the CBDT, if, after furnishing return of income, an assessee does not receive a notice u/s 143(2) of the Act from the Department within period stipulated in the proviso to section 143(2) of the Act, it follows that the return filed by the assessee has become final and no scrutiny proceedings should be started in respect of that return. In other words, in the present case, assessment proceedings u/s 143 of the Act came to end and 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 v. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 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 certain income chargeable to tax had escaped assessment on account of determination of arm's length price of the international transaction with the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 70 (Mad.); (v) East Coast Commercial Co. Ltd. v. ITO, [1981] 128 ITR 326 (Cal.); (vi) Equitable Investment Co. (P.) Ltd. v. ITO, [1988] 174 ITR 714 (Cal.); and, (vii) S. Sreeramachandra Murthy v. 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. v. ACIT, [2010] 329 ITR 257 (Bom.) wherein it has been held that the validity of the reopening of assessment has to be determined with reference to the reasons which had weighed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 v. 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'ble Punjab & Haryana High Court in the case of M/s Coca Cola India Inc (supra) has to be appreciated in the light of the fact-situation therein. In the case of M/s Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra), 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 consequence, the subsequent assessment order passed u/s 143(3) r.w.s. 147 and 144C(13) of the Act is liable to be quashed. We hold so. 36. As the prelimina ..... 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