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TMI Blog2008 (12) TMI 67X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 (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 assessment within the meaning of Section 147 of the Act. A notice dated 30.3.2005 was issued under Section 148 of the Act, requiring the petitioner to file a return and thereafter, some further information was sought from the petitioner for the purpose of assessment. The petitioner filed reply to the said notice, seeking reasons for proposed reassessment. The reasons indicated that the Assessing Officer referred to Section 92 of the Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 not subject to tax in India, which is not the situation in the present case. Further contention is that there was no occasion for determining arm's length price as the price determined by the petitioner itself is as per Section 92 (1) and (2) of the Act i.e. cost plus 5%. In such a situation, there was no occasion to make reference to the Transfer Pricing Officer. Even if the reference was sought to be made, the petitioner was entitled to be he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uired 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 determine the amount of profits which may reasonably be deemed to have been derived therefrom and include such amount in the total income of the resident." Section 147:- "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, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ength 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 be determined having regard to the arm's length price of such benefit, service or facility, as the case may be. (3) The provisions of this section shall not apply in a case where the computation of income under sub-section (1) or the determination of the allowance for any expense or interest under that sub-section, or the determination of any cost or expense allocated or apportioned, or, as the case may be, contributed under sub-section (2), has the effect of reducing the income chargeable to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gn, 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 relating thereto are influenced by such other enterprise; or (j) where one enterprise is controlled by an individual, the other enterprise is also controlled by such individual or his relative or jointly by such individual and relative of such individual; or (k) where one enterprise is controlled by a Hindu undivided family, the other enterprise is controlled by a member of such Hindu undivided family or by a relative of a member of such Hindu undivided family or jointly by such member and his relative; or ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf; or (c) the information or data used in computation of the arm's length price is not reliable or correct; or (d) 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 the arm's length price in relation to the said internat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on (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 1st day of June, 2007 but the order under subsection (3) has not been made by the Transfer Pricing Officer before the said date, or a reference under subsection (1) is made on or after the 1st day of June, 2007, an order under sub-section (3) may be made at any time before sixty days prior to the date on which the period of limitation referred to in section 153, or as the case may be, in section 153B for making the order of assessment or reassessment or recomputation or fresh assessment, as the case may be, expires. (4) On receipt of the order under sub-section (3), the Assessing Officer shall proceed to compute the total income of the assessee under sub-section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting 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, distribution, acquisition or control of articles or goods, or know-how, patents, copyrights, trademarks, 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 the provision of services of any kind, or in carrying out any work in pursuance of a contract, or in investment, or providing loan or in the business o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 definitions of certain expressions occurring in the said sections." 14. Relevant extract from the Statement of Objects and Reasons dealing with transfer pricing is given below ([2001]248 ITR (St.) 1, 133):- "It is proposed to substitute the said section by new sections 92, 92A, 92B, 92C, 92D, 92E and 92F relating to computation of income from international transactions having regard to the arm's length price, meaning of associated enterprise, meaning of international transaction, computation of arm's length price, maintenance of information and documents by persons entering into internationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 information and documents are required to be retained. During the course of any proceedings under the Act, an Assessing Officer or Commissioner (Appeals) may require any person who has entered into an international transaction to furnish any of the information and documents specified under the rules within a period of thirty days from the date of receipt of a notice issued in this regard, and such period may be extended by a further period not exceeding thirty days. The new section 92E seeks to provide that every person who has entered into an international transaction during a previous year sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 Sahkari Griha Nirman Samiti (2000) 4 SCC 357. 18. In support of submissions that the petitioner was entitled to an opportunity of being heard, reliance was placed on judgment of the Hon'ble Supreme Court in Rajesh Kumar v. Deputy CIT [2006] 287 ITR 91; 2007(2) SCC 187. It was submitted that opportunity had become all the more necessary in view of amendment w.e.f. 1.6.2007 vide Finance Act, 2007, amending Section 92CA(4) of the Act to the effect that order of the Transfer Pricing Officer would be final and binding on the Assessing Officer and the Assessing Officer has to determine the price in conformity with the order of the Transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 meaning. History or object of provisions may be relevant only if there is ambiguity in the meaning of a statutory provision. There could be no violation of Article 14 of the Constitution in reading the provisions as being applicable to situations contemplated in the Statute irrespective of there being no material to show diversion of profits outside India or erosion of tax. The very nature of transaction between associates could be a just and valid ground to scrutinize the transaction with a view to ensure that true value is declared in the transaction and there is no manipulation of the profit derived by a non-resident, particularly when ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 763) :- "6. It should be remembered that the question before us relates to the correct interpretation of a word appearing in a Constitution Act which, as has been said, must not be construed in any narrow and pedantic sense. Gwyer, C.J. in In re The Central Provinces and Berar Sales of Motor Sprit and Lubricants Taxation Act, 14 of 1938, [1938] 1 STC1; (1939) FCR 18, observed at pages 36-37 that the rules which apply to the interpretation of other statutes apply equally to the interpretation of a constitutional enactment subject to this reservation that their application is of necessity conditioned by the subject-matter of the enactment itself. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 treating the ostensible loan as the receipt of dividend? In our opinion, it would be difficult to hold that in making the fiction, the legislature has travelled beyond the legislative field assigned to it by Entry 82 in List I." (Underlining supplied). 30. In Keshavji Ravji & Co. v. CIT, (1990) 183 ITR 1(SC); (1990) 2 SCC 231; AIR 1991 SC 1806 dealing with a similar issue, it was observed (page 9 of 183 ITR):- "11…..Section 40(b), it is true, seeks to prevent the evasion of tax by diversion of the profits of a firm; but the legislative expedience adopted to achieve that objective requires to be given effect on its own language. Section 40 opens with the non ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orth 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…….The set-off in this case is, no doubt, the result of a statutory provision. In the case of partners, the special legal incidents of their relationship would substitute for the statutory provision and govern the situation. Indeed, even the idea of a set-off itself, which presupposes a duality of entities, may be out of place in the very nature of the relationship between a firm and its partners where the former is a mere compendious reference to the latter. But even to the extent the income tax law which identifies the firm as a distinct entity and unit of assessment goes, the idea of set-off may be invoked in view of the mutuality implicit in the putative d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tutionality 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 confine its restrictions to those cases where the need is deemed to be the clearest and finally that in order to sustain the presumption of constitutionality the Court may take into consideration matters of common knowledge, matters of common report, the history of the times and may assume every state of facts which can be conceived existing at the time of legislation. (Paragraph 15). The legislature is the best judge of what is good for the community, by whose suffrage it comes into existence....". This should be the proper approach for the court but the ultimate responsibility for determining the validity of the law must rest with the court." (Paragraph 21, also see the severa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. The above observations have been followed, inter alia, in M.K. Ranganathan and another v. Govt. of Madras [1955] 25 Comp Cas 344; AIR 1955 SC 604, Gujarat University v. Shri Krishna Rangnath Mudholkar, AIR 1963 SC 703, Gurudevdatta VKSSS Maryadit v. State of Maharashtra" AIR 2001 SC 1980, Paragraph 18 and Raymond Limited and another v. State of Chhattisgarh AIR 2007 SC 2854. 37. In M.K. Ranganathan [1955] 25 Comp Cas 344; AIR 1955 SC 604, it was observed:- "19. The statement of objects and reasons is certainly not admissible as an aid to the construction of a statute. But it can be referred to for the limited purpose of ascertaining the conditions prevailing at the time which actuated the spons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alls 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 the hardship may appear to the judicial mind to be. On the other hand if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however, apparently within the spirit of the law the case might otherwise appear to be." 41. We may also refer to the judgments relied upon on behalf of the petitioner to see whether any different law has been laid down therein. 42. In K.P. Varghese v. ITO, (1981) 131 ITR 597(SC); (1981) 4 SCC 173; AIR 1981 SC 1922, question was of interpretation of section 52 of the Act. It was held that literal interpretation resulted in absurdity and thus, the said provision was held to be applicable where there was undervaluation. The relevant observations are (page 60 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 that income escaped assessment. The said provision is not in any manner controlled by Section 92 of the Act nor there is any limit to consideration of any material having nexus with the opinion on the issue of escapement of assessment of income. Interference with the notice for reassessment is called for only where extraneous or absurd reasons are made the basis for opinion proposing to reassess. Apart from the fact that the Assessing Officer has given other reasons, it cannot be held that the material relied upon by the Assessing Officer for proposing reassessment is irrelevant. Whether or not the said material should be finally taken into account for reassessment is a matter which has to be left open to be decided by the Assessing Officer after considering the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assesse to establish that there in fact existed no belief or that the belief was not at all a bona fide one or was based on vague, irrelevant and nonspecific information. To that limited extent, the Court may look into the conclusion arrived at by the Income-tax Officer and examine whether there was any material available on the record from which the requisite belief could be formed by the Income-tax Officer and further whether that material had any rational connection or a live link for the formation of the requisite belief. It would be immaterial whether the Income-tax Officer at the time of making the original assessment could or, could not have found by further enquiry or investigation, whether the transaction was genuine or not, if on the basis of subsequent information, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal 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 by laying down the requirement of and mechanism for determination of arm's length price. 'International transaction' and 'associated enterprises' have been well defined under Sections 92B and 92A of the Act. International transaction is a transaction between two or more associated enterprises, either or both of whom are non-residents. Associated enterprise is an enterprise which participates in management or control of capital or other gains. The provision for computing arm's length price has been applied to income arising from international transactions. The Statute is, thus, applicable to well defined class which meets the test of intelligible differentia. It also meets the test of rational relationship to the object i.e. to determine the real income. The income arising from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der 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 petitioner. The applicability of the provisions to the petitioner is very much consistent with the object. The language cannot be controlled or limited by the objects of preventing tax evasion or of preventing transfer of profits outside India as per any other notion except the manner statutorily laid down. The language being clear, the provisions will be attracted to an international transaction i.e. a transaction between two associated enterprises at least one of whom is not resident, having price less than arm's length price. 56. As regards judgment of the Bombay High Court in SGS India Pvt. Ltd. (supra), we do not find any relevance thereof to the present case, as the question is that of applicability of Chapter X to the period prior to 1.4.2002. Similarly, the judgment of Delhi High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X
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