2016-TII-54-HC-MUM-INTL

DIT Vs DOOSAN HEAVY INDUSTRIES AND CONSTRUCTION COMPANY LTD: BOMBAY HIGH COURT (Dated: October 4, 2016)

Income tax - comprehensive insurance cover - escaped assessment - offshore supply of equipments - project contractor & reasons for reopening.

Whether mere description as a 'supplier' in a suit filed by a project contractor against insurance company claiming an insurance claim for loss of equipment, when the contractor insured the equipment jointly with the purchaser, can be presumed as escapement of any income arising out of sale of the equipment - NO: HC

The assessee is a Project Contractor. It was awarded a contract by Kondapalli Power Corporation Ltd.(KPCL), Andhra Pradesh to set up a power plant on a turnkey basis. Further, KPCL had awarded an onshore contract to the assessee for supply of goods and services along with the commissioning of the plant. KPCL also awarded an offshore supply contract to Hanjung DCM Co. Ltd. (Hanjung) for supply of equipment valued at US$ 103 million. The equipment valued at US$ 103 million was supplied by Hanjung and taken delivery of outside India by the Assessee for and on behalf of KPCL. The aforesaid equipment was lost during its transit after the Assessee took delivery from Hanjung. As the insurance claim was not honoured, the Assessee filed a suit against the Insurance Company for recovery of US$ 103 million. The regular assessment proceeding was completed for the subject A.Y u/s 143(3) assessing income under MAT at Rs.6,38,062/. Subsequently, it was noticed that there was another contract titled “Offshore Equipment Supply Contract” entered into between M/s. Lanco Kondapalli Power Private Limited and M/s. Hanjung DCM Co. Ltd. having its registered office at Korea. This contract was of USD 103 millions. Although this contract was apparently with different person it was seen that a recovery suit of insurance for loss of equipment was filed on behalf of the assessee. The assessee had not disclosed the portion of the revenue amounting to USD 103 million received on account of the same from India in its return. Thus, the AO had reason to believe that income of USD 51.5million chargeable to tax had escaped assessment, resulting in issuance of reopening notice u/s 148.

On appeal, the CIT(A) held that the assessee did not at any time declare himself as the owner of the goods but rather declared itself as an EPC contractor for KPCL; and that the statement in the plaint had to be appreciated in the context of the overall contract for the supply of equipment, Onshore Civil and Construction Service Contract, responsibility for transportation, etc. The CIT(A) came to the conclusion that it could not be established that the assessee had supplied (as owner) the equipment, material and design, and that the word “supply” only refers to the responsibilities of the assessee for setting up of the power project as per the onshore contract. The reasons as recorded do not therefore suggest any link between the material found by him and his conclusion that there was reason to believe that the income chargeable had escaped assessment.

Having heard the parties, the High Court held that,

+ it is found that the two authorities have concurrently reached a finding of fact that the Assessee was not the supplier of the equipment and it had taken out insurance claim only in its capacity as contractor and in terms of the contract entered into between the parties. This conclusion was recorded by the CIT(A) as well as the Tribunal upon consideration of the contract entered into between the parties and particularly with regard to transit insurance. The contract provided that the contractor, i.e. Assessee will provide/arrange at its own cost in the joint name of the owner and contractor a comprehensive insurance cover to the project, including any damage to the goods during transit. It was in that context that the Assessee had made a claim for insurance. Taking into account the concurrent findings of fact arrived at by the CIT(A) and by the Tribunal, the view taken is a very possible view. Nothing has been shown to indicate that the finding is perverse. No doubt at the stage of a notice of reopening, the AO does not have to "establish" that any income has escaped assessment. He must simply be shown to have formed an opinion, which, in turn, is supported by reasons. The reasons themselves must be based on some material. A minimum requirement one would expect in the face of this scheme of things is that the material used by the AO for forming his opinion must have some bearing or nexus with escapement of income. If not, the reopening notice would be clearly without jurisdiction;

+ in the present case, the material used by the AO for purportedly forming this opinion is the description of the assessee of itself as “a supplier” of the equipment in an EPC contract, which inter alia required it to take offshore delivery of the equipment from a foreign vendor and supply and install the same onshore. Mere description as a “supplier” in a suit by the assessee against the insurance company claiming an insurance claim for loss of equipment, when the assessee insured the equipment jointly with the purchaser, can possibly have no connection with the escapement of any income arising out of sale of the equipment. Since that was the only material used by the Assessing Officer for issuance of the reopening notice, the notice is without any legal basis or justification. The authorities below were clearly, therefore, right in setting aside the notice. One more fact to be noted is that for the A.Ys 1999-2000 and 2002-03, a coordinate bench of the Tribunal had taken a view that the Assessee has not sold any equipment and it's only obligation was to insure the goods/equipment during transit done by it either on its own or through a subcontractor. In the above view, the question of law, as proposed, does not give rise to any substantial question of law.

Revenue's appeal dismissed

2016-TII-523-ITAT-HYD-TP

ASTRIX LABORATORIES LTD Vs ADDL CIT : HYDERABAD ITAT (Dated: September 28, 2016)

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

Keywords - ALP - bulk manufacturing company - domestic entities - international transaction & selection of comparables.

Whether under the facts of case, it is only the bulk manufacturing companies such as the assessee, which should be considered as comparable to the assessee - YES : ITAT

Whether the transaction between two companies is not amenable to the proceedings u/s 92C, if both are domestic companies and hence not involving an international transaction u/s 92B - YES: ITAT

The assessee is engaged in the business of manufacture of active pharmaceuticals ingredients and its intermediates. Consequent to filing of its return, the AO observed that in the previous year, assessee had entered into international transactions pertaining to purchase of raw material and sale of finished goods. Therefore, a reference was made to the TPO to determine the ALP of the international transaction u/s 92CA. The TPO, determined the ALP of the international transactions and in accordance with the same, the AO proposed the adjustment in the draft assessment order. Aggrieved by the same, the assessee preferred its objections before the DRP, which granted partial relief to the assessee. In accordance with the directions of the DRP, final assessment order was passed.

Having heard the parties, the Tribunal held that,

+ it is found that the Tribunal in the assessee's own case for the A.Y 2007-08, has considered the issue of comparability of formulation companies with the assessee and had held that: "....For making necessary adjustment if separate segmental accounts are available, the TPO ought to take only the segmental details of the comparable company. In the case before us, the TPO has taken companies which are involved in both the activities on the ground that sufficient number of comparables are not available. But, from the order of the TPO, we find that even as per the filter adopted by the Transfer Pricing Officer, at least six companies are available for comparison, which are into manufacture of only bulk drugs as in the case of the assessee. Therefore, we hold that only such companies are to be adopted for the purpose of determination of ALP...." Therefore, respectfully following the same, the AO is directed to exclude the companies which are not in the manufacturing of bulk drugs alone;

+ as regards NATCO Pharma Ltd and Fresenius Kabi Oncology Ltd are concerned, we find that the TPO has himself adopted the turnover filter of Rs.200 to Rs.400 crores, while these two companies have turnover of less than Rs.100 crores. Therefore, we direct the TPO to exclude the same from the final list of comparables. As regards the comparability of SMS Pharmaceuticals Ltd is concerned, though the assessee submitted that it has taken the contention before the DRP that there were the extra ordinary events of amalgamation in the said company, we find that the details were not available before the TPO or DRP and none of the authorities have verified the contention of the assessee. Therefore, we deem it fit and proper to remand this issue to the file of the AO/TPO to examine whether the extra ordinary events have occurred in the case of the said company and whether they have any impact on the financial results of the said company for the relevant A.Y. Therefore, comparability of this company alone is remitted to the file of the AO/TPO for reconsideration;

+ as regards the order of the TPO in holding that the transaction between the taxpayer and Matrix Laboratories Ltd is an international transaction requiring computation of ALP u/s 92CA, the AR submitted that this issue also had arisen in the assessee's own case for the A.Y 2007-08 and the Tribunal therein has held that: ".....Taking due note of these decisions of the coordinate benches of this Tribunal in assessee's own case for A.Ys 2006-07 and 2009-10, it is held that the transactions between the assessee and the Matrix Laboratories are not international transactions and the same are not amenable to transfer pricing adjustment u/s 92B...." Therefore, respectfully following the same, we hold that the transaction between the assessee and Matrix Laboratories Ltd both being domestic companies is not an international transaction u/s 92B of the Act during the relevant A.Y and the same are not amenable to the proceedings u/s 92C.

Case Remanded