Analysis of the following Case Law has been provided by CA Mahananda Nevade, the author can be reached at ca.mahananda@gmail.com
The Bangalore Bench of ITAT held that reopening of completed assessments under Section 153C of the Income-tax Act ,1961 (the Act) and making reference to transfer pricing is invalid when no incriminating material found during search. Himalaya Drug Co. v. DCIT (ITA Nos. 1634 to 1639/Bang/2012)
Takeaways:
Assessment proceedings under Section 153C of the Income-tax Act, 1961 (the Act) is invalid for assessments which are already completed and no incriminating material found in search pertaining to transfer pricing.
The Dispute Resolution Panel (DRP) is empowered to take into consideration the new issues which comes to notice in course of proceedings before it.
DRP directions are valid, when they were issued and communicated to taxpayer within time under section 144C of the Act.
Background:
The taxpayer is engaged in the business of manufacture and sale of herbal pharmaceutical products, personal care products, animal health care products etc.
During assessment proceedings for the AY 2009-10, the Assessing Officer (AO) finalized the assessment order under Section 143(3) of the Act with some expenses disallowances and also making few additions without making any reference to transfer pricing officer (TPO) for the taxpayer’s international transactions for a determination of the arm’s length price.
Aggrieved by the order of AO the taxpayer filed an an appeal before the Commissioner of Income-Tax (Appeals) [CIT (A)] and then Tribunal.
During the same time the Bangalore Police seized large amount of cash from the residence of Company Director.
Based on above findings, the tax authorities initiated search proceedings under Section 132A of the Act and a notice under Section 153C of the Act was served to taxpayer to file the tax returns for AY 2003-04 to 2008-09.
During the course of assessment proceedings, the AO made a reference to TPO for determination of ALP of taxpayer's international transactions and accordingly TPO proposed transfer pricing adjustment. Based on draft assessment order taxpayer filed an objection before the Dispute Resolution Panel (DRP). DRP confirmed the TPO adjustments and further directed TPO to make additional transfer pricing adjustment on account of advertising, marketing and promotion expenses (AMP expenses) which were not covered in the TP report under Section 92E of the Act.
Aggrieved by the order of the AO and directions of DRP, the taxpayer filed an appeal before the Tribunal.
Following are the taxpayer contentions:
1) As per Section 144C (5) read with subsection (8) of the same section,the DRP directions are meant to provide guidance to the AO to enable him to complete the assessment.
2) Further, DRP had failed to issue directions within the period of 9 months from the end of the month in which the draft assessment order is served on the taxpayer. (DRP directions were issued to AO on 4 September 2012 and the time limit for issuance of directions had expired on 31 August 2012).
3) Reference to TPO was not valid as there was no incriminating material found during search which was referred to TP for non- abated assessments.
4) The taxpayer claimed that DRP does not have the powers to issue any direction in respect of AMP expenditure which did not form part of the TPO’s order thereby exceeding its jurisdiction.
Following are the Tax Department's contentions:
1) The assessment order was passed pursuant to DRP directions as per Section 144C of the Act as amended by the Finance Act, 2012. Accordingly as per the amendment, irrespective of the provisions of Section 153 of the Act, the AO is required to pass final assessment order within one month of receipt of DRP directions under Section 144C(13) of the Act.
Tribunal noted the following timeline:
1) First assessment under Section 143(3) of the Act was completed without making any reference to TPO for AY 2003-04 and 2004-05;
2) For AY 2005-06, assessment was completed and taxpayer's appeal at CIT(A) was pending disposal
3) For AY 2006-07, time limit for issue of notice under Section 143(2) of the Act had expired.
Tribunal's Ruling
1) The Tribunal observed that several hearing have taken place before 16 August 2012 and therefore, DRP was in position to issue directions on 16 August 2012. Further directions are forwarded to the taxpayer only on principle of natural justice and the same does not give rise to any cause of action.
2) Tribunal stressed on the expression 'issue' which means to send out, so that the concerned officer is not in a position to tamper or alter the order.
3) Taxpayer's argument that dispatch of DRP direction on the taxpayer is immaterial and what is contemplated under Section 144C of the Act is the issue of directions to AO.
4) The Tribunal referred to DRP Rules, 2009 and observed that the rules contemplates that the first directions must be issued and later on should be communicated to the taxpayer and AO.
5) The Tribunal observed that final assessment order should have been passed on or before 31 December 2011 as per section 153C however actual order was passed on 29 October 2012. Hence current assessment order under Section 153C was barred by time limitation.
6) The Legislature has brought about single assessment concept in place of dual assessment as per Chapter XIV-B with the introduction of Sections 153A, 153B, 153C and 153D of the Act. Further, Tribunal referred to second proviso to section 153A and reiterated that pending assessment during the proceedings under Section 153A or 153C of the Act will abate and only single assessment is to be made both for disclosed and undisclosed income.
7) Accordingly, the Tribunal observed that the assessments made under Section 153C for the AYs 2003-04 to 2006-07 were invalid as the assessment proceedings for those years had already attained finality and no incriminating material pertaining to transfer pricing adjustment was discovered in search.
8) DRP is empowered to consider the new issue during the course of proceedings under Section 144C(8) of the Act.
Analysis of the following Case Law has been provided by CA Mahananda Nevade, the author can be reached at ca.mahananda@gmail.com
The Bangalore Bench of ITAT held that reopening of completed assessments under Section 153C of the Income-tax Act ,1961 (the Act) and making reference to transfer pricing is invalid when no incriminating material found during search. Himalaya Drug Co. v. DCIT (ITA Nos. 1634 to 1639/Bang/2012)
Takeaways:
Assessment proceedings under Section 153C of the Income-tax Act, 1961 (the Act) is invalid for assessments which are already completed and no incriminating material found in search pertaining to transfer pricing.
The Dispute Resolution Panel (DRP) is empowered to take into consideration the new issues which comes to notice in course of proceedings before it.
DRP directions are valid, when they were issued and communicated to taxpayer within time under section 144C of the Act.
Background:
The taxpayer is engaged in the business of manufacture and sale of herbal pharmaceutical products, personal care products, animal health care products etc.
During assessment proceedings for the AY 2009-10, the Assessing Officer (AO) finalized the assessment order under Section 143(3) of the Act with some expenses disallowances and also making few additions without making any reference to transfer pricing officer (TPO) for the taxpayer’s international transactions for a determination of the arm’s length price.
Aggrieved by the order of AO the taxpayer filed an an appeal before the Commissioner of Income-Tax (Appeals) [CIT (A)] and then Tribunal.
During the same time the Bangalore Police seized large amount of cash from the residence of Company Director.
Based on above findings, the tax authorities initiated search proceedings under Section 132A of the Act and a notice under Section 153C of the Act was served to taxpayer to file the tax returns for AY 2003-04 to 2008-09.
During the course of assessment proceedings, the AO made a reference to TPO for determination of ALP of taxpayer's international transactions and accordingly TPO proposed transfer pricing adjustment. Based on draft assessment order taxpayer filed an objection before the Dispute Resolution Panel (DRP). DRP confirmed the TPO adjustments and further directed TPO to make additional transfer pricing adjustment on account of advertising, marketing and promotion expenses (AMP expenses) which were not covered in the TP report under Section 92E of the Act.
Aggrieved by the order of the AO and directions of DRP, the taxpayer filed an appeal before the Tribunal.
Following are the taxpayer contentions:
1) As per Section 144C (5) read with subsection (8) of the same section,the DRP directions are meant to provide guidance to the AO to enable him to complete the assessment.
2) Further, DRP had failed to issue directions within the period of 9 months from the end of the month in which the draft assessment order is served on the taxpayer. (DRP directions were issued to AO on 4 September 2012 and the time limit for issuance of directions had expired on 31 August 2012).
3) Reference to TPO was not valid as there was no incriminating material found during search which was referred to TP for non- abated assessments.
4) The taxpayer claimed that DRP does not have the powers to issue any direction in respect of AMP expenditure which did not form part of the TPO’s order thereby exceeding its jurisdiction.
Following are the Tax Department's contentions:
1) The assessment order was passed pursuant to DRP directions as per Section 144C of the Act as amended by the Finance Act, 2012. Accordingly as per the amendment, irrespective of the provisions of Section 153 of the Act, the AO is required to pass final assessment order within one month of receipt of DRP directions under Section 144C(13) of the Act.
Tribunal noted the following timeline:
1) First assessment under Section 143(3) of the Act was completed without making any reference to TPO for AY 2003-04 and 2004-05;
2) For AY 2005-06, assessment was completed and taxpayer's appeal at CIT(A) was pending disposal
3) For AY 2006-07, time limit for issue of notice under Section 143(2) of the Act had expired.
Tribunal's Ruling
1) The Tribunal observed that several hearing have taken place before 16 August 2012 and therefore, DRP was in position to issue directions on 16 August 2012. Further directions are forwarded to the taxpayer only on principle of natural justice and the same does not give rise to any cause of action.
2) Tribunal stressed on the expression 'issue' which means to send out, so that the concerned officer is not in a position to tamper or alter the order.
3) Taxpayer's argument that dispatch of DRP direction on the taxpayer is immaterial and what is contemplated under Section 144C of the Act is the issue of directions to AO.
4) The Tribunal referred to DRP Rules, 2009 and observed that the rules contemplates that the first directions must be issued and later on should be communicated to the taxpayer and AO.
5) The Tribunal observed that final assessment order should have been passed on or before 31 December 2011 as per section 153C however actual order was passed on 29 October 2012. Hence current assessment order under Section 153C was barred by time limitation.
6) The Legislature has brought about single assessment concept in place of dual assessment as per Chapter XIV-B with the introduction of Sections 153A, 153B, 153C and 153D of the Act. Further, Tribunal referred to second proviso to section 153A and reiterated that pending assessment during the proceedings under Section 153A or 153C of the Act will abate and only single assessment is to be made both for disclosed and undisclosed income.
7) Accordingly, the Tribunal observed that the assessments made under Section 153C for the AYs 2003-04 to 2006-07 were invalid as the assessment proceedings for those years had already attained finality and no incriminating material pertaining to transfer pricing adjustment was discovered in search.
8) DRP is empowered to consider the new issue during the course of proceedings under Section 144C(8) of the Act.
Analysis of the following Case Law has been provided by CA Mahananda Nevade, the author can be reached at ca.mahananda@gmail.com
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