TII CIRCULAR

RBI Circulars - 05

Import Data Processing and Monitoring System (IDPMS)

CASE LAWS

2016-TII-77-HC-P&H-TP

SHRI VISHNU EATABLES INDIA LTD Vs DCIT: PUNJAB & HARYANA HIGH COURT (Dated: October 3, 2016)

Income Tax - Sections 92A(1), 92C, 92D, 92E, 132, 142(1), 153A, 153C & 271G.

Keywords: international transactions - AE - writ of certiorari - show cause notice - reasons to believe - search -opportunity of being heard.

Whether the provisions of Chapter-X are not applicable to the international transactions undertaken by an assessee as they were not with its associated enterprises within the meaning of that expression in the Act - YES: HC

Whether if the satisfaction recorded by AO contains sufficient reasons, he has indicated the relationship between assessee and the other parties, that is sufficient to refer the matter to TPO & the viability of such allegations need not be proved further in order to issue a notice for assessment - YES: HC

Whether an assessee is entitled as a matter of right to invoke the writ jurisdiction at the stage of reference by the Assessing Officer to the TPO, his grievances can be raised in a challenge to the draft assessment order before the Disputes Resolution Panel or the final assessment order before to CIT(A) - NO: HC

The assessee company seeks a writ of certiorari to quash the reference by the first respondent to the second TPO and the satisfaction recorded by the first respondent for making the reference. The relief was sought on the ground that the provisions of Chapter-X were not applicable to the international transactions undertaken by assessee as they were not with its AEs within the meaning of that expression in the Act. It was contended, therefore, that the entire proceedings including the reference to TPO for AY 2011-12 was without jurisdiction and void. DCIT by a notice called upon the assessee to show cause why its cases for the AYs 2011-12 to 2014-15 be not transferred to the TPO. The notice granted the petitioner a hearing. The notice referred to the earlier questionnaire issued by the Department in connection with the assessment proceedings u/s 153A, 153C and 142(1) and stated that during the course of a survey of the petitioner's premises various documents were found and impounded. The notice further stated that the petitioner had made sales to its group companies M/s Haryana Trading Company, Dubai managed by one Kushal Mittal and M/s Indian Treat Pvt. Ltd. Singapore managed by one Sunny Mittal; that the sales to the sister concern were under invoiced with a view to evading tax and that profits from India were diverted to tax havens which were remitted back to India for investing in properties by said Kushal Mittal and his family members. The notice further stated that the Accountant's report under section 92E in Form No. 3CEB was not furnished by assessee. Assessee by its letter denied that it had under invoiced its exports. It had also alleged that the remittances of said Kushal Mittal were in the normal course of business and were personal transactions with one Adarsh Kumar and M/s Vashudev Trading Company and that said Kushal Mittal was not directly or indirectly related to either the said Adarsh Kumar or M/s Vashudev Trading Company. Adarsh Kumar and M/s Vashudev Trading Company were shown in the bank statements tabulated in the show cause notice. It was further stated that neither M/s Haryana Trading Company, Dubai nor M/s Indian Treat Pvt. Ltd. Singapore were the asssseee's AEs; that the assessee was not required to submit the accountant's report u/s 92E and that its case was not liable to be referred to the TPO.

A show cause notice in continuance of the earlier letters including the show cause notice was issued in respect of the AYs 2008-09 to 2010-11 calling upon the assessee to show cause why its cases for the said years be not also referred to the TPO. By a letter, the TPO informed the assessee that he had received a reference u/s 92CA(1) from respondent No.1 to determine u/s 92CA(3) the ALP in respect of international transactions/specified domestic transaction entered into by the assessee during the FY 2010-11 corresponding to AY 2011-12. The assessee was called upon to produce the evidence and/or material relied upon by it in support of its computation of ALP of the said transactions as well as various other documents including form No.3CEB and information and documents maintained u/s 92D(1) read with rules 10D(1) and (3) of the Income Tax Rules, 1962 alongwith a copy of TP study report. Assessee further argued that there was no international transaction or specified domestic transaction undertaken by it during AYs 2008-09 to 2014-15 with an AE and accordingly it was not required to submit the Form No.3CEB.

DCIT under the cover of a letter forwarded the reasons/satisfaction recorded by him before referring the matter to TPO. The reasons/satisfaction note was titled; "Reasons/Satisfaction note for transfer the case of M/s Shri Vishnu Eatables (India) Ltd. PAN: AABCS4831R to TPO, New Delhi". The satisfaction note referred to the search and seizure operation u/s 132 carried out at the assessee's premises and the incriminating documents found and seized during the search. The satisfaction note further recorded that Rs. 33 crores were surrendered. However, complete taxes on the said undisclosed income had not been paid. The assessee and its group were not cooperating in the assessment proceedings. The assessee had under invoiced its sales to its said group companies/sister concerns with a view to evading tax. A comparative chart tabulating the export sales to the sister concerns were set out. Profit from India was diverted to tax heavens which were then remitted back to India for investing in properties by Kushal Mittal and his family members. Their bank details were also tabulated. The details tabulated showed that the assessee exported its products to its related concerns but that assessee had failed to file the accountant's report u/s 92 in Form-3CEB alongwith its return of income. The assessee and the said companies "are family members". The said Kushal Mittal, who managed the Haryana Trading Company, Dubai was the son of Vishnu Bhagwan Mittal, a key person as well as MD/promoter of assessee. The sales by the assessee to the sister concern were at very low rates and the sister concern in turn sold the same at much higher rates and the income generated thereby found its way back to India and was invested in properties by the members of the group. Instruction No.3/2016 dated 10.03.2016 issued by the Central Board of Direct Taxes was held applicable. The circular contains instructions for reference to the TPO inter-alia where search and seizure or survey operations had been carried out and findings regarding transfer pricing issues have been recorded by the Assessing Officer.

Held that,

+ we are in respectful agreement with the view that it is necessary for the AO to decide the objections, if any, to the applicability of Chapter-X before referring the transactions to the TPO as also before determining the ALP himself. To the reasons furnished by the Bombay HC for this view we venture to add reasons of our own. In another case of Vodafone India Service Pvt. Ltd. v. Union of India and others 2013-TII-14-HC-MUM-TP a Division Bench of the Bombay High Court held that where a reference is made u/s 92CA(1), TPO must determine ALP of the transaction and in doing so he would not be entitled to consider the question as to whether the transaction referred to him is an international transaction or not. In a case where AO himself determines ALP, the assessee would be entitled to place his case before him including regarding the question as to whether the transactions are international transactions or not. If the assessee does not accept the AO's determination of these issues, he would be entitled to challenge the same before the CIT(A) and thereafter before Tribunal. Both the appellate authorities would have the benefit of the case of the Revenue and of the assessee. However, if AO decides to refer the determination of ALP to the TPO without affording the assessee an opportunity of being heard and without deciding the objections, as to whether the transaction is an international transaction or not, the assessee would be severely prejudiced for it would then not have had an opportunity of having this objection even considered once the reference is made u/s 92A(1) TPO cannot for reasons stated in the second Vodafone's judgment 2013-TII-14-HC-MUM-TP consider the question as to whether the transaction referred to him is an international transaction or not. This in turn would affect the assessment proceedings itself for AO would also be deprived the opportunity of arriving at a informed decision as to whether the transaction that he prima-facie considered to be an international transaction is or is not infact an international transaction;

+ in the present case there was a search and seizure operation at the petitioner's premises and it is the respondent(s) case that the petitioner has not filed the accountant's report u/s 92E. The petitioner's case, therefore, falls within paragraph 3.3 (c) and the first sub-paragraph after the opening part of paragraph 3.4, both of which have been emphasized by us. The circular further provides that in such cases the AO must "record his satisfaction". The words used are "record his satisfaction" which indicate firstly that AO must reduce his satisfaction in writing and secondly he must furnish reasons for the same. That the satisfaction is to be in writing is clear from the word "record". Moreover paragraph 3.3 expressly states that the AO "must …pass a speaking order…". We have, however, already held that the satisfaction recorded by AO in the present case contains sufficient reasons. He has indicated the relationship between the assessee and the other parties. He has made a comparative chart and alleged that the sales were under invoiced. That is sufficient to refer the matter to TPO. Whether the allegations are true or not must be tested before the authorities under the Act and not in a Writ Petition under Article 226. The challenge on this ground is, therefore, unsustainable. This brings us to Ms. Suri's second submission, namely, that the order recording satisfaction upon which the Principal, Commissioner of Income Tax, grants permission, must be served upon the assessee. We agree. The purpose of this exercise of granting the assessee an opportunity of raising objections and being heard and the requirement of AO to furnish reasons for the satisfaction for the reference of the transaction to the TPO for determination of the arm's length price is inter-alia to enable the assessee firstly to meet the case and represent against it to the TPO before AO on the ground that there is no international transaction and secondly in the event of his objections being overruled, an opportunity of challenging the same before the Disputes Resolution Panel or the Commissioner of Income Tax(Appeals) as the case may be, and thereafter before Tribunal;

+ an assessee is not entitled as a matter of right to invoke the writ jurisdiction at the stage of reference by the Assessing Officer to the TPO. His grievances can be raised in a challenge to the draft assessment order before the Disputes Resolution Panel or the final assessment order before to CIT(A). The requirements of the rules of natural justice and of the said circular dated 10.03.2016 would have been met even if the satisfaction note is furnished subsequently. As we noted earlier, in any event the assessee cannot raise the question as to whether or not the referred transaction is an international transaction before TPO. It is, therefore, sufficient if he is served with the order subsequently even alongwith the draft assessment order or the assessment order as the case may be. In view of the above findings we are inclined to dismiss the writ petition. In view of the fact that the reference to the TPO has already been made after obtaining the approval of the Pr.CIT the objection raised by the petitioner may be taken before the DRP or the CIT(A) as the case may be. It is necessary, however, now to consider the nature of the order to be passed. As the provisions of the Act and of the circular have not been complied with strictly and the matter already stands referred to the TPO it is necessary to protect the petitioner in certain aspects. Normally the petitioner would have had an opportunity of contending that the transactions are not international transactions as they are not with its AEs before the AO himself. That stage having passed, it is only fair that if the petitioner chooses the DRP route or the CIT(A) route, the DRP or the CIT(A) as the case may be ought to first adjudicate the question as to whether the said transactions are international transactions or not. If they come to the conclusion that they are not international transactions, certain consequences may follow which we keep open for the petitioner to take before the DRP or the CIT(A) as the case may be. We clarify that in the event of the CIT(A) or the DRP coming to the conclusion that they are international transactions, it would not be necessary for them to stall the proceedings and they may proceed to decide them finally. We see no reason for these authorities to stall the proceedings if they come to the conclusion that the transactions are international transactions. The penalty proceedings u/s 271(G) have been initiated on the basis that the provisions of Chapter-X and in particular Sections 92D and 92E have not been complied with. As we noted earlier the petitioner did not have an opportunity of representing its case to the effect that these transactions are not international transactions. It is only fair then that while the penalty proceedings may continue the order imposing penalty, if any, shall not be implemented till the decision of the DRP or the CIT(A) as the case may be on the preliminary issue as to whether it is an international transaction or not. In the circumstances the writ petition is dismissed.

Assessee's writ dismissed

2016-TII-516-ITAT-DEL-TP

CONTROL RISKS INDIA PVT LTD Vs DCIT: DELHI ITAT (Date: September 28, 2016)

Income tax - Sections 92CA, 143(3) & 144C.

Keywords - Admission of fresh evidence - ALP - AE - Investment services - Re characterization of transaction & Transfer pricing.

Whether where the agreement between the assessee and its AE clearly elaborates that the assessee was incorporated to assist its AE by rendering consultancy services, it is not open to the TPO to re-characterizing the assessee's business as that of providing financial advisory services, for purpose of comparing it with an entity engaged in share trading - YES : ITAT

The assessee company is engaged in providing crisis and security consultancy services, and is a wholly owned subsidiary of control risks group holding Ltd., London. During the financial year 2009-10, the assessee for the purpose of business of consulting business intelligence services, fraud investigation, etc. entered into the cross border transaction with its offshore affiliates.For the purpose of benchmarking analysis the TPO applied his own sets of comparables and made adjustments. The TPO howeer rejected the benchmarking analysis undertaken by the assessee by applying TNMM.

Having heard the parties, the Tribunal held that,

+ it is seen that the prayer for fresh evidence and remand is not opposed by the revenue. We find that though the TPO in his order has extracted the activities of assessee as that of consulting business intelligence services, fraud investigation, etc, and in respect of functional profile of the assessee, it is reported that it was incorporated for offering a comprehensive range of consultancy services that assist clients to manage political, security, operational and integrity risks at every stage of an investment. However, thereafter he concluded that as per the TP report submitted, taxpayer is engaged in providing investment and other financial advisory to its AE. Accordingly, as a result of the above wrong characterization, the consequential steps of selection of comparable companies engaged in trading in shares; share transfer services etc. suffers from foundational fundamental errors and mistakes. We note that in the functional profile as per the transfer pricing study placed on record, the assessee's functions has been described elaborately;

+ the facts set out in the TP study report on the basis of distribution and sales agreement entered into by the assessee and its AE have admittedly not been considered and the characterization based on past precedent by the TPO has been followed in haste. Accordingly, considering the judicial precedent and the material available on record, in the light of the submissions of the parties before the Bench, we deem it appropriate to admit the fresh evidences filed. Since the evidences have to be considered for the first time again following the precedent these are remitted to the TPO with the direction to pass a speaking order in accordance with law after giving the assessee a reasonable opportunity of being heard.

2016-TII-515-ITAT-DEL-TP

CONTROL RISKS INDIA PVT LTD Vs DCIT: DELHI ITAT (Dated: September 27, 2016)

Income tax - Sections 37(1), 92C, 92CA & 201(1A)

Keywords - ALP - AE - Business expenditure - Comparable selection process - FAR analysis - Interest on late payment of TDS & TP adjustment

Whether an entity engaged in providing crisis and security consultancy services to its offshore affiliates, can be straight away equated to that of a provider of financial advisory services in absence of any FAR analysis, for comparing it with an entity engaged into trading in shares and investment - NO: ITAT

Whether interest levied u/s 201(1A) for late payment of tax, is not compensatory in nature and therefore, could not be allowed as expenditure u/s 37(1) - YES : ITAT

A) The assessee company is engaged in providing crisis and security consultancy services. It is a 100% subsidiary of control risks group holding Ltd., London. During the financial year 2009-10, the assessee for the purpose of business of consulting business intelligence services, fraud investigation, etc. entered into the cross border transaction with its offshore affiliates.For the purpose of benchmarking analysis the TPO applied his own sets of comparables and made adjustments. The assessee objected to the said adjustments and contended that the TPO has inadvertently considered the business of the assessee as a provider of financial advisory services and has erred consequently in comparing the assessee with companies engaged in the business of stock-broking and companies having different revenue streams such as revenue from sale of shares and brokerages.

B) The assessee company claimed interest expenses amounting to Rs. 10,17,083/- on account late deposit of Service tax and TDS. The DRP disallowed said claim.The assessee contended that payment of interest was compensatory in nature and not in the nature of a penalty and since it had been incurred wholly and exclusively for the business of the assessee, the same may be allowed.

Having heard the parties, the Tribunal held that,

FAR analysis & Selection of comparables

+ on considering the comparables selected and on considering the discussion carried out by the TPO in his order that the conclusions drawn qua the characterization need to be re-addressed. We find from the discussion carried out by the TPO that a general discussion of the employee profile for providing business services like accounting, reporting, market support etc. has been undertaken and the TPO has proceeded to consider that the service is Financial Advisory Services and not a routine service but a high end service. We find that instead of specifically addressing the employee profile of the tax payer the TPO has proceeded on a general discussion so as to justify the conclusion drawn right at the outset that "the taxpayer is engaged in providing investment and other financial advisory to its AE." The said conclusion, it is found is oblivious to the profile addressed in by the TPO himself. When the above factual narration is considered in the light of the conclusion drawn and the Objections posed before the DRP when read alongwith the copy of Distributors & Sales Agreement would show that the assessee is engaged in the "provision of crisis and security consultancy, outsourced security management, crisis response, investigative services, forensics and other risk management consultancy services (' the Consultancy Services') in the territory in which they operate ("Territory")." When all this is considered in the context of the Copy of agreement filed u/Rule 29 of the ITAT Rules there appears to be no doubt whatsoever that the tax authorities have not correctly appreciated the activity of the tax payer as a result thereof the characterization i.e the FAR analysis itself is flawed;

+ considering the ratio of the decision of the Jurisdictional High Court in Text Hundred India Private Limited, we find that the assessee has successfully demonstrated that since the very nature of assessee's business activity has not been correctly understood the conclusion drawn for characterisation of the assessee suffer from a fundamental error wherein the TPO has understood the assessee on considering the TP report filed as being engaged in providing investment and other financial advisory services to its AE. Whereas the peculiar facts of the case as evident from the evidence placed before the TPO and the tax authorities read along with the fresh evidence sought to be placed in the proceedings before us whose filing has not been objected to by the Revenue demonstrates to the contrary. We find that the taxpayer no doubt undertakes financial services but these are not activities engaged in stock broking; trading; depositaries etc. these are in the context of forensic, investigative, risk assessments etc. requiring appreciation of socio-political and geopolitical studies which necessarily impact the financials and may be incorporated in the financial comparative information provided by various other taxpayers however when coupled with the forensic services which the taxpayer definitely renders which is evident from the extract of the redacted agreements entered into by the assessee company with its customers the nature of the activity impacting its FAR needs to be addressed. It is seen that even if the nature of activities impact the ultimate decision-making qua the financial information provided however, by no stretch of imagination the assessee can be compared with companies who are trading in shares and investments. Accordingly holding the fresh evidences as relevant and crucial to determine the issues, the fresh evidence is admitted. In view of the above, the issue is restored to the file of the TPO to carry out a FAR analysis of the assessee after characterizing its activity on the basis of evidence on record and then proceed to selecting comparables as per Rules;

Interest expenses

+ it is seen that the DRP after considering catena of decisions held that 'the interest u/s 201(1A) has been levied holding the taxpayer to be in default and therefore, it cannot be said that it was merely compensatory in nature. The explanation below section 37(1) was introduced retrospectively to clarify the position where otherwise disallowable expenditure were claimed as deduction u/s 37(1) and not to allow the claims in the situation before the Panel. When the tax itself is otherwise not allowable either u/s 37(1) or u/s 40(a)(ii), interest there upon cannot be allowed. In any case, TDS is made on account of the "rate or tax levied on the profits or gains of any business and profession" on the transaction covered therein and therefore, on this account also interest u/s 201 (1A) of the Act is not allowable in deduction. Under these facts, the Panel holds that the said claim of interest u/s 201(1A) is not an allowable deduction'.

Case remanded