CASE LAW

DB CORPORATION LTD Vs DCIT : GUJARAT HIGH COURT (Dated: August 10, 2016)

Income tax - Sections 40A(2)(b), 92C(3) & 92CA(1).

Keywords - assessee's objection - international transaction - opportunity to contest & TP adjustment.

Whether AO has the liberty to consider the objections filed by the assessee even after the TOP sends the Report to the AO u/s 92C(3) - YES: HC

Whether the assessee has an opportunity to contest the question of international transaction u/s 144C before the DRP - YES: HC

The assessee had filed its return disclosing total income of Rs. 330.00 crores and the same was taken in scrutiny by the AO. During scrutiny assessment, the AO referred the case of assessee for computation of ALP to the TPO u/s 92CA(1). The assessee raised objections to such reference. The same was however rejected. The case of the assessee was that the provisions of transfer pricing did not apply to it, as there were no international transactions nor were there any specified domestic transaction within the meaning of Section 92BA during the period under consideration.

Having heard the parties, the Tribunal held that,

+ in terms of clause (i) of Section 92BA, in case of any expenditure in respect of which payment has been made or is to be made to a person referred to u/s 40A(2)(b) and where the aggregate of such transactions entered into by the assessee in the previous year exceeds a sum of Rs. than 5 crores would be a specified domestic transaction. Section 40A(2)(a) refers to a case where assessee incurs any expenditure in respect of which payment has been made or is to be made to any person referred to in clause (b). In such a situation, if the AO is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made, it is open for the AO to make deduction. In terms of Clause (vi)(B) thus, where the assessee is a company and such company or any director of company or any relative of such director of the company has a substantial interest in the business or profession of that person would be covered under the said provision. It is noticed that the assessee had made expenditure in the nature of advertisement, rent and purchase of investment in subsidy to Writers & Publishers Pvt. Ltd., aggregate of which admittedly exceeds Rs. 5 crores. In that view of the matter, the question would be, whether the exceeding of 20% of share holding by the directors and relatives of the assessee company in the aggregate in Writers & Publishers Pvt. Ltd satisfy the requirement of clause (vi) of Section 40A(2)(b). In case of Veer Gems vs. Assistant Commissioner of Income Tax and anr, this Court had examined the provisions of transfer pricing with the focus on the reference by the AO and it was held that when a reference is made by the AO to the TPO, the TPO would not be competent to decide the issue of correctness of the reference. His duty would be to determine the ALP in accordance with Section 92C. It was further held that while framing the assessment in terms of the report submitted by the TPO u/s 92C(3), there is nothing to prevent the AO from considering the objections of the assessee that, in fact, there had no international transaction between the assessee and any other person. It was further noted that the assessee would have one more opportunity to contest the question of international transaction u/s 144C before the DRP. The DRP would also have the power to completely nullify the variations arising out of the order of TPO if it is found that there had, in fact, been no international transaction and that therefore, the reference itself was invalid;

+ as noted, in the present case, there is prima facie material suggesting that the directors of the assessee company, in the aggregate, held more than 20% of the shares in voting power in Writers & Publishers Pvt. Ltd. The aggregate of expenditure incurred by the assessee to such company exceeded Rs. 5 crores. Under the circumstances, we would allow the transfer pricing procedure to carry on further without interjecting at this intermediary stage. The legal contention of the assessee that in the report of the AO, the basis of Section 40A(2)(b) was not taken and therefore, now cannot be raised versus the Revenue's contention, that if on admitted facts on the strength of correct statutory provisions the exercise of powers can be saved the order should not be quashed, are kept open. Likewise, the question whether Section 40A(2)(b) Clause (vi) would cover only the international holding of the director or the relative of the director of the assessee company or the aggregate of the holdings is also not concluded in this petition.

Assessee's petition dismissed