2016-TII-97-HC-KOL-TP

PRICE WATERHOUSE Vs CIT: CALCUTTA HIGH COURT (Dated: December 8, 2016)

Income tax - Sections 92B, 92CA & 92D

Keywords - ALP - AE - international transaction - non refundable recipts - service charges & writ jurisdiction

The assessee is a partnership firm of CAs which provides professional services within the Regulations and Framework of the ICAI Act. It had entered into an agreement with PricewaterhouseCoopers International Limited (PwCIL) a company incorporated in the United Kingdom, to become a member of PwCIL. The member firms of PwCIL are collectively known as the PwC Network and the assessee i.e., PWH is an independent member of the PwC Network of firms. PrisewaterhouseCoopers Services BV, Netherlands (Services BV) is the central services entity of the PwC Network and operates exclusively for the mutual benefit of all PwC Network member firms. In furtherance and support of the coordinating activities and purpose of PwCIL, PwC member firms pay the costs of coordinating activities together with the costs of developing and strengthening the PwC Network incurred by Services BV. During the year under consideration, a non-refundable loan of INR 65,06,55,000/- was received by the PwC Network, to strengthen PWH's audit practices in India. Such loan was provided to meet the costs needed to improve the audit quality and training in the manner which allowed for sustainable operations and enhanced sustainable audit quality. The grant was received under the contractual arrangement existing between Services BV and PWH and has been accounted for as sundry income on an accrual basis and has been offered for taxation as business income. The assessee however failed to explain the necessity of such an agreement when as per its statements, under the service agreement, Services BV could have provided the non-refundable grant to PWH for the same purpose as envisaged in the grant agreement. During A.Y 2010-11, the assessee had also received a sum of Rs. 20,76,83,056/- as non-refundable grant from Services BV, however, failed to file any details about the receipt of such non-refundable grant. Similar nonrefundable grant of Rs. 86,68,40,869/- was received by PWH in the A.Y 2012-13. PWH has contended that these grants were received for strengthening the audit practices in India, however, failed to disclose how such non-refundable grant was spent.

Consequent to the same, the USA Security Exchange Authorities imposed a fine of US $7.5 million on the PWC Indian Firms on account of fraud committed in connection with the Satyam Scam. Though the date of the order was 5 April, 2011 PWH has debited its account for a penalty of Rs 6,74,17,026/- in the financial year 2010-11. However, PWH never disclosed the costs of litigation in the USA in the Satyam fraud case including who had borne the expenses of litigation and whose accounts have been debited with the costs. In the meanwhile, the investigation wing of the I-T Department made enquiries pursuant to a tax evasion petition received in respect of PWH and Lovelock and Lewes. Finally, a reference was made by the AO to the TPO for determining ALP in relation to the international transaction entered into by the assessee with its AE.

On appeal, the HC held that,

Whether when the AO is of a prima facie view that an international transaction is involved and it is necessary or expedient to refer the computation of ALP in relation thereto to the TPO, he will be well within his powers to do so - YES: HC

Whether the opinion of the TPO is binding on the AO - NO: HC

Whether the AO is at liberty to ignore the opinion/report of the TPO, if he is satisfied that the reference to the TPO was without jurisdiction - YES: HC

+ Sec. 92CA(1) envisages that where the AO considers it 'necessary or expedient' to do so, he may with the approval of the Commissioner refer the computation of ALP in relation to the concerned international transaction to the TPO. The said section does not contemplate that the AO has to first come to a definite finding that there is an international transaction within the meaning of Sec. 92B before he can exercise his power to refer the matter to the TPO. So long as he is of a prima facie view that an international transaction is involved and it is necessary or expedient to refer the computation of the ALP in relation thereto to the TPO, he will be well within his powers to do so. In the present case, PWH shall have full opportunity of impressing upon the TPO that it and Services BV are not AEs. Whether or not Services BV participates directly or indirectly in the management or control or capital of PWH and whether or not at least one of the conditions mentioned u/s 92A(2) is satisfied, are factual issues which the TPO is equipped and competent to decide. Further, the decision of the TPO is in the nature of an opinion. The TPO will send his opinion to the AO who shall conduct the reassessment proceeding taking into consideration such opinion of the TPO and upon notice to the assessee. The opinion of the TPO is not binding on the AO and the assessee will have a second opportunity of arguing before the AO or the DRP as envisaged u/s 144C that the parties involved are not AEs and hence there is no international transaction and consequently reference to the TPO was without jurisdiction. If so satisfied, the AO would be at liberty to ignore the opinion/report of the TPO;

+ The nature of transaction between PWH and Services BV is not totally clear. There appears to be several service agreements between the two enterprises, one of 1998, the second one of 2009 and the third one of 2011. Admittedly PWH received a non-refundable amount of approximately Rs. 68.51 crores during the A.Y 2011-12 and also a nonrefundable grant of approximately Rs. 20.76 crores during the A.Y 2010-11. The true nature of these receipts by PWH from Services BV needs to be ascertained. Nomenclature is not decisive. Showing the said amounts as non-refundable grants in the accounts of PWH may not reveal the true nature of such receipts. Further, PWH appears to have been making regular payments as service charges to Services BV but the nature of the services rendered by the said Dutch Company to PWH is not at all clear. The submissions made on behalf of the petitioners as regards the functions of Services BV and the services rendered by it are very general in nature and lacking in particulars and precision. The true nature and character of the transaction between PWH and Services BV requires to be ascertained and such factual issues cannot be and should not be gone into by the Writ Court. The I-T Act has empowered the TPO to compute the ALP in relation to international transactions and the said statutory authority should be allowed to discharge its functions. It is open to the assessee to impress upon the TPO that no international transaction is involved, in which case, the TPO will undoubtedly return an appropriate report to the AO;

Whether a matter of existence of an 'international transaction' between the assessee and its AE, requiring examination of diverse factual issues, should be adjudicated by the TPO/AO and not a court of writ jurisdiction - YES: HC

+ Diverse factual issues, some of which are intricate in nature, will have to be resolved in order to ascertain whether or not PWH and Services BV are involved in any international transactions within the meaning of Sec 92B. The Writ Court is not a fact finding forum. It will be open to PWH to urge all points before the TPO that have been urged before this Court and all points are left open for the TPO to decide in accordance with law including the point of maintainability of the reference made to him uninfluenced by any observation made in this judgment and order. In the event the TPO has conducted any proceeding ex parte or has passed any order u/s 92CA, the same shall stand set aside. The TPO shall issue a fresh notice to the assessee and hold proceedings afresh after giving full opportunity of hearing to the assessee.

Case remanded