Applicability of transfer pricing provisions for reopening of assessment under section 147 of IT Act

The provision of section 147 is not, in any manner, controlled by section 92 nor there is any limit to consideration of any material having nexus with the opinion on the issue of escapement of assessment of income; requirement of section 147 is fulfilled if the AO can legitimately form an opinion that income chargeable to tax has escaped assessment; for forming such opinion, any relevant material can be considered and the order of TPO can certainly have nexus for reaching the conclusion that income has been incorrectly assessed or has escaped assessment; in such a situation, it cannot be held that the notice proposing reassessment is vitiated merely because one of the reasons referred to order of TPO. 

IN THE HIGH COURT OF PUNJAB AND HARYANA
AT CHANDIGARH.

C.W.P. No.16681 of 2005

M/s Coca Cola India Inc.

Versus

Assistant Commissioner of Income Tax, Gurgaon & others.

Date of Judgment: 17^th December, 2008

 J   U   D   G   M   E   N   T

Adarsh Kumar Goel, J.:

1. This petition questions application of Transfer Pricing Provisions in Chapter X of the Income Tax Act, 1961 (for short, “the Act”) to the petitioner and quashing of notices under Sections 148 and 92 CA(3) of the Act.

2. Case set out in the petition is that the petitioner is a company incorporated under the laws of United States of America and is, thus, a foreign company under Section 2(23A) of the Act. It has a Branch office in India. It is a part of International Coca Cola corporate group. The said group has other companies operating in India incorporated under the Companies Act, 1956.

3. The petitioner obtained permission under Section 29(1)(a) of the Foreign Exchange Regulation Act, 1973 (FERA) to operate a Branch office in India to render services to Coca Cola Group companies, as per conditions mentioned in the application for the said permission. There is a service agreement between the petitioner on the one hand and Britco Foods Company Private Limited (Britco) on the other. As per the said agreement, the petitioner provides advisory services to Britco to advise, monitor and coordinate the activities of bottlers, in consideration of which the petitioner receives fee calculated on the basis of actual cost plus 5%. The petitioner was assessed under the Act for the assessment year 1998-99 on 31.3.2004. The Assessing Officer, however, formed an opinion that income of the petitioner, chargeable to tax for the said year, had escaped assessment within the meaning of Section 147 of the Act. A notice dated 30.3.2005 was issued under Section 148 of the Act, requiring the petitioner to file a return and thereafter, some further information was sought from the petitioner for the purpose of assessment. The petitioner filed reply to the said notice, seeking reasons for proposed reassessment. The reasons indicated that the Assessing Officer referred to Section 92 of the Act, which enables the Assessing Officer to determine profits which may reasonably deemed to have been derived, when less than ordinary profits are shown to have been derived by a resident. It was further stated in the said reasons that as per order dated 7.2.2005 under Section 92 CA (3) for the assessment year 2002-03, passed by the Transfer Pricing Officer-I, the profit declared by the petitioner was abnormally low, on account of which arm’s length price had been fixed. On that account, the income of the assessee had escaped assessment. Similar notices were issued for the assessment years 1999-2000, 2000-01 and 2001-02.

4. On July 14, 2005, notice under Section 92CA(3) of the Act was issued by the Additional Commissioner of Income Tax acting as Transfer Pricing Officer, on a reference made by the Assessing Officer under Section 92CA(1) of the Act for the assessment year 2003-04, to determine arm’s length price. Identical notices were issued for the assessment years 2004-05, 2005-06 and 2006-07. The Assessing Officer made assessment in respect of income of the petitioner for the assessment year 2002-03 vide order dated 24.3.2005 after getting determined arm’s length price of services rendered by the petitioner to its associated company, thereby enhancing the income of the assessee. Against the said order, the petitioner has preferred an appeal which is still pending before the appropriate authority.

5. The petitioner filed the present writ petition in this Court on 19.10.2005. On 21.10.2005, notice was issued to the respondents and vide order dated 18.11.2005, stay of passing of final order for the assessment years 2003-04, 2004-05, 1998-99 to 2001-02 was granted. Similarly, on 15.12.2006, stay of passing of final order for the assessment year 2005-06 was granted and permission to amend the petition was also granted to challenge notice in respect of the said year. Similarly, on 26.5.2008, stay of passing of final order for the assessment year 2006-07 was granted. The petitioner has further amended the petition to challenge the notice in respect of assessment year 2006-07, which amendment has been allowed by a separate order.

6. Main contention raised in the writ petition is that provisions of Chapter X i.e. Sections 92 to 92F of the Act have been enacted with a view to prevent diversion of profits in intra-group transactions leading to erosion of tax revenue. The said provisions have been incorporated vide Finance Act, 2001 and further amended vide Finance Act, 2002. Having regard to the object for which provisions have been enacted, applicability of the said provisions has to be limited to situations where there is diversion of profits out of India or where there may be erosion of tax revenue in intra group transaction. In the present case, there is neither any material to show diversion of profits outside India nor of erosion of tax revenue. If the price charged was less and profit of the petitioner was less, there was corresponding lesser claim for deduction by Britco. Question of diversion of profits out of India would arise only if price charged is higher and that too if the higher profit is not subject to tax in India, which is not the situation in the present case. Further contention is that there was no occasion for determining arm’s length price as the price determined by the petitioner itself is as per Section 92 (1) and (2) of the Act i.e. cost plus 5%. In such a situation, there was no occasion to make reference to the Transfer Pricing Officer. Even if the reference was sought to be made, the petitioner was entitled to be heard before such a decision is taken, so that it could show that reference to Transfer Pricing Officer was not called for. In objecting to notices for reassessment, contention raised is that provisions of Chapter X having been introduced only from 1.4.2002, there could be no reassessment for the period from 1.4.1997 to 31.3.2001. It is pointed out that prior to amendment w.e.f. 1.4.2002 under Section 92 of the Act, there was a provision for determination of reasonable profits deemed to have been derived by a resident and not a ‘non resident’. Amended provision could not be applied to the petitioner for the period prior to 31.3.2001.

7. In the reply filed on behalf of the respondents, the impugned notices and orders have been defended.

8. As regards the period prior to assessment year 2002-03, when amended provisions of Chapter X were not operative, stand of the respondents is that the petitioner suppressed its profit in its transactions with its associated companies, which was clear from the proportion of amount of working capital employed to the declared profit and this resulted in escapement of income within the meaning of Section 147 of the Act.

 9. As regards the period for and after the assessment year 2002-03, it was submitted that the said Chapter was applicable to the petitioner as the petitioner had entered into “international transaction” within the meaning of the said provisions with its “associated enterprises”. There was no condition that the said Chapter could apply only if the parties were not subject to the tax jurisdiction in India. Only requirement is that at least one of the parties should be non-resident, apart from other requirements in the said chapter.

10. Following questions arise for consideration:-

(i)         Whether inapplicability of unamended provisions of Section 92 of the Act (as it stood prior to 1.4.2002) to the petitioner created a bar to reassessment of escaped income of the petitioner

(ii)        Whether order passed by Transfer Pricing Officer under Chapter X after 1.4.2002 could be one of the reasons for reassessment for period prior to introduction of amended Chapter X in the Act?

(iii)       Whether provisions of Chapter X are attracted when both the parties to a transaction are subject to tax in India, in absence of allegation of transfer of profits out of India or evasion of tax?”

 (iv)       Whether opportunity of being heard is required before referring the matter of determination of arm’s length price to Transfer Pricing Officer?

11. Before we consider the above questions, it will be appropriate to reproduce the relevant statutory provisions of Section 92 (unamended), Section 147, Section 92 (amended) to Section 92F (amended). Section 92 (unamended):-

“Where a business is carried on between a resident and a non-resident and it appears to the Assessing Officer that, owing to the close connection between them, the course of business is so arranged that the business transacted between them produces to the resident either no profits or less than the ordinary profits which might be expected to arise in that business, the Assessing Officer shall determine the amount of profits which may reasonably be deemed to have been derived therefrom and include such amount in the total income of the resident.”

Section 147:-

“If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year):

Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year.

Explanation 1: Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso.

Explanation 2: For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely:-

(a)        Where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax;

(b)        Where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return;

(c)        Where an assessment has been made, but –

(i)         Income chargeable to tax has been underassessed; or

(ii)        Such income has been assessed at too low a rate; or

(iii)       Such income has been made the subject of excessive relief under this Act; or

(iv)       Excessive loss or depreciation allowance or any other allowance under this Act has been computed.”

Section 92 to 92F:-

“92. (1) Any income arising from an international transaction shall be computed having regard to the arm’s length price.

Explanation.— For the removal of doubts, it is hereby clarified that the allowance for any expense or interest arising from an international transaction shall also be determined having regard to the arm’s length price.

(2) Where in an international transaction, two or more associated enterprises enter into a mutual agreement or arrangement for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises, the cost or expense allocated or apportioned to, or, as the case may be, contributed by, any such enterprise shall be determined having regard to the arm’s length price of such benefit, service or facility, as the case may be.

(3) The provisions of this section shall not apply in a case where the computation of income under sub-section (1) or the determination of the allowance for any expense or interest under that sub-section, or the determination of any cost or expense allocated or apportioned, or, as the case may be, contributed under subsection (2), has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction was entered into.

92A. (1) For the purposes of this section and sections 92, 92B, 92C, 92D, 92E and 92F, associated enterprise, in relation to another enterprise, means an enterprise (a) which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; or (b) in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise.

(2) For the purposes of sub-section (1), two enterprises shall be deemed to be associated enterprises if, at any time during the previous year,

(a)        one enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in the other enterprise; or

(b)        any person or enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in each of such enterprises; or

(c)        a loan advanced by one enterprise to the other enterprise constitutes not less than fifty-one per cent of the book value of the total assets of the other enterprise; or

(d)        one enterprise guarantees not less than ten per cent of the total borrowings of the other enterprise; or

(e)        more than half of the board of directors or members of the governing board, or one or more executive directors or executive members of the governing board of one enterprise, are appointed by the other enterprise; or

(f)        more than half of the directors or members of the governing board, or one or more of the executive directors or members of the governing board, of each of the two enterprises are appointed by the same person or persons; or

(g)        the manufacture or processing of goods or articles or business carried out by one enterprise is wholly dependent on the use of know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights; or

(h)        ninety per cent or more of the raw materials and consumables required for the manufacture or processing of goods or articles carried out by one enterprise, are supplied by the other enterprise, or by persons specified by the other enterprise, and the prices and other conditions relating to the supply are influenced by such other enterprise; or

(i)         the goods or articles manufactured or processed by one enterprise, are sold to the other enterprise or to persons specified by the other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprise; or

(j)        where one enterprise is controlled by an individual, the other enterprise is also controlled by such individual or his relative or jointly by such individual and relative of such individual; or

(k)        where one enterprise is controlled by a Hindu undivided family, the other enterprise is controlled by a member of such Hindu undivided family or by a relative of a member of such Hindu undivided family or jointly by such member and his relative; or

(l)         where one enterprise is a firm, association of persons or body of individuals, the other enterprise holds not less than ten per cent interest in such firm, association of persons or body of individuals; or

(m)       there exists between the two enterprises, any relationship of mutual interest, as may be prescribed.

92B.(1) For the purposes of this section and sections 92, 92C, 92D and 92E, “international transaction” means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises.

(2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise.

92C.(1) The arm’s length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :—

(a)        comparable uncontrolled price method;

(b)        esale price method;

(c)        cost plus method;

(d)        profit split method;

(e)        transactional net margin method;

(f)        such other method as may be prescribed by the Board.

(2) The most appropriate method referred to in subsection (1) shall be applied, for determination of arm’s length price, in the manner as may be prescribed:

Provided that where more than one price is determined by the most appropriate method, the arm’s length price shall be taken to be the arithmetical mean of such prices, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean.

(3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that—

(a)        the price charged or paid in an international transaction has not been determined in accordance with sub-sections (1) and (2); or

(b)        any information and document relating to an international transaction have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf; or

(c)        the information or data used in computation of the arm’s length price is not reliable or correct; or

(d)        the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D, the Assessing Officer may proceed to determine the arm’s length price in relation to the said international transaction in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him: Provided that an opportunity shall be given by the Assessing Officer by serving a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the arm’s length price should not be so determined on the basis of material or information or document in the possession of the Assessing Officer.

(4) Where an arm’s length price is determined by the Assessing Officer under sub-section (3), the Assessing Officer may compute the total income of the assessee having regard to the arm’s length price so determined:

Provided that no deduction under section 10A or section 10AA or section 10B or under Chapter VI-A shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under this sub-section:

Provided further that where the total income of an associated enterprise is computed under this sub-section on determination of the arm’s length price paid to another associated enterprise from which tax has been deducted or was deductible under the provisions of Chapter XVIIB, the income of the other associated enterprise shall not be recomputed by reason of such determination of arm’s length price in the case of the first mentioned enterprise.

92CA (1) Where any person, being the assessee, has entered into an international transaction in any previous year, and the Assessing Officer considers it necessary or expedient so to do, he may, with the previous approval of the Commissioner, refer the computation of the arms length price in relation to the said international transaction under section 92C to the Transfer Pricing Officer.

(2) Where a reference is made under sub-section (1), the Transfer Pricing Officer shall serve a notice on the assessee requiring him to produce or cause to be produced on a date to be specified therein, any evidence on which the assessee may rely in support of the computation made by him of the arms length price in relation to the international transaction referred to in sub-section (1).

(3) On the date specified in the notice under sub-section (2), or as soon thereafter as may be, after hearing such evidence as the assessee may produce, including any information or documents referred to in sub-section (3) of section 92D and after considering such evidence as the Transfer Pricing Officer may require on any specified points and after taking into account all relevant materials which he has gathered, the Transfer Pricing Officer shall, by order in writing, determine the arms length price in relation to the international transaction in accordance with sub-section (3) of section 92C and send a copy of his order to the Assessing Officer and to the assessee.

(3A) Where a reference was made under sub-section (1) before the 1st day of June, 2007 but the order under subsection (3) has not been made by the Transfer Pricing Officer before the said date, or a reference under subsection (1) is made on or after the 1st day of June, 2007, an order under sub-section (3) may be made at any time before sixty days prior to the date on which the period of limitation referred to in section 153, or as the case may be, in section 153B for making the order of assessment or reassessment or recomputation or fresh assessment, as the case may be, expires.

(4) On receipt of the order under sub-section (3), the Assessing Officer shall proceed to compute the total income of the assessee under sub-section (4) of section 92C in conformity with the arms length price as so determined by the Transfer Pricing Officer.

(5) With a view to rectifying any mistake apparent from the record, the Transfer Pricing Officer may amend any order passed by him under sub-section (3), and the provisions of section 154 shall, so far as may be, apply accordingly.

(6) Where any amendment is made by the Transfer Pricing Officer under subsection (5), he shall send a copy of his order to the Assessing Officer who shall thereafter proceed to amend the order of assessment in conformity with such order of the Transfer Pricing Officer.

(7) The Transfer Pricing Officer may, for the purposes of determining the arms length price under this section, exercise all or any of the powers specified in clauses (a) to (d) of sub-section (1) of section 131 or sub-section (6) of section 133.

Explanation. For the purposes of this section, Transfer Pricing Officer means a Joint Commissioner or Deputy Commissioner or Assistant Commissioner authorised by the Board to perform all or any of the functions of an Assessing Officer specified in sections 92C and 92D in respect of any person or class of persons.

92D. (1) Every person who has entered into an international transaction shall keep and maintain such information and document in respect thereof, as may be prescribed.

(2) Without prejudice to the provisions contained in sub-section (1), the Board may prescribe the period for which the information and document shall be kept and maintained under that sub-section.

(3) The Assessing Officer or the Commissioner (Appeals) may, in the course of any proceeding under this Act, require any person who has entered into an international transaction to furnish any information or document in respect thereof, as may be prescribed under sub-section (1), within a period of thirty days from the date of receipt of a notice issued in this regard:

Provided that the Assessing Officer or the Commissioner (Appeals) may, on an application made by such person, extend the period of thirty days by a further period not exceeding thirty days.

92E. Every person who has entered into an international transaction during a previous year shall obtain a report from an accountant and furnish such report on or before the specified date in the prescribed form duly signed and verified in the prescribed manner by such accountant and setting forth such particulars as may be prescribed.

92F.In sections 92, 92A, 92B, 92C, 92D and 92E, unless the context otherwise requires,

(i)         accountant shall have the same meaning as in the Explanation below subsection (2) of section 288;

(ii)        arms length price means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions;

(iii)       enterprise means a person (including a permanent establishment of such person) who is, or has been, or is proposed to be, engaged in any activity, relating to the production, storage, supply, distribution, acquisition or control of articles or goods, or know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights, or the provision of services of any kind, or in carrying out any work in pursuance of a contract, or in investment, or providing loan or in the business of acquiring, holding, underwriting or dealing with shares, debentures or other securities of any other body corporate, whether such activity or business is carried on, directly or through one or more of its units or divisions or subsidiaries, or whether such unit or division or subsidiary is located at the same place where the enterprise is located or at a different place or places; (iiia) permanent establishment, referred to in clause (iii), includes a fixed place of business through which the business of the enterprise is wholly or partly carried on;

(iv)       specified date shall have the same meaning as assigned to due date in Explanation 2 below subsection (1) of section 139;

(v)        transaction includes an arrangement, understanding or action in concert, (A) whether or not such arrangement, understanding or action is formal or in writing; or (B) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceeding.

12. It will also be appropriate to reproduce the Statement of Objects and Reasons in the speech of the Finance Minister while introducing the Finance Bill, 2001, as under:-

“The presence of multinational enterprises in India and their ability to allocate profits in different jurisdictions by controlling prices in intra-group transactions has made the issue of transfer pricing a matter of serious concerned, I had set up an Expert Group in November, 1999 to examine the issues relating to transfer pricing. Their report has been received, proposing a detailed structure for transfer pricing legislation. Necessary legislative changes are being made in the Finance Bill based on these recommendations.”

13. In the memorandum explaining the provisions of the Finance Bill, it was inter-alia stated as under:-

“The increasing participation of multinational groups in economic activities in the country has given rise to new and complex issues emerging from transactions entered into between two or more enterprises belonging to the same multinational group. The profits derived by such enterprises carrying on business in India can be controlled by the multinational groups by manipulating the prices charged and paid in such intra-group; transactions, thereby, leading to erosion of tax revenues.

With a view to provide a statutory framework which can lead to computation of reasonable, fair and equitable profits and tax in India, in the case of such multinational enterprises, new provisions are proposed to be introduced in the Income-tax Act. These provisions relating to computation of income from international transactions having regard to arm’s length price, meaning of associated enterprise, meaning of international transaction, determination of arm’s length price, keeping and maintaining of information and documents by persons entering into international transactions, furnishing of a report from an accountant by persons entering into such transactions and definitions of certain expressions occurring in the said sections.”

14. Relevant extract from the Statement of Objects and Reasons dealing with transfer pricing is given below:-

“It is proposed to substitute the said section by new sections 92, 92A, 92B, 92C, 92D, 92E and 92F relating to computation of income from international transactions having regard to the arm’s length price, meaning of associated enterprise, meaning of international transaction, computation of arm’s length price, maintenance of information and documents by persons entering into international transactions, furnishing of a report from an accountant by persons entering into international transaction and definitions of certain expressions occurring in the new sections. It is proposed to substitute section 92 by a new section to provide that any income arising from an international transaction shall be computed having regard to arm’s length price. It further provides that the cost of expenses shall be at arm’s length price. The proposed new sections 92A and 92B provide meaning of the expressions “associated enterprise” and “international transaction” with reference to which the income is to be computed under the new section 92. The proposed new section 92C provides for computation of arm’s length price. The section provides that the arm’s length price in relation to an international transaction shall be determined by (a) comparable uncontrolled price method; or (b) resale price method; or (c) cost plus method; or (d) profit split method; or (e) transactional net margin method; or (f) any other method which may be prescribed by the Central Board of Direct Taxes. One of these methods shall be the most appropriate method which shall be applied for computation of arm’s length price in the manner as may be specified by the rules to be made by the Central Board of Direct Taxes in this behalf. In a case where more than one price can be determined by the most appropriate method, in such case the arm’s length price shall be the arithmetical mean of such two or more prices. The new section further provides that where during the course of any proceeding for the assessment of income the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that the price charged in the international transaction has not been determined in accordance with sub-sections (1) and (2) or information and documents relating to the international transaction have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 29D, and the rules made in this behalf or the information or data used in computation of the arms’ length price is not reliable or correct or the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D, the Assessing Officer may proceed to determine, after giving an opportunity of being heard to the assessee, the arm’s length price in relation to the said transaction in accordance with the sub-sections (1) and (2) of this section, on the basis of such material or information or documents available with him. The new section 92D seeks to provide that every person who has entered into an international transaction shall keep and maintain such information and documents as may be specified by rules by the Central Board of Direct Taxes. The Central Board of Direct Taxes may also specify by the rules the period for which the information and documents are required to be retained. During the course of any proceedings under the Act, an Assessing Officer or Commissioner (Appeals) may require any person who has entered into an international transaction to furnish any of the information and documents specified under the rules within a period of thirty days from the date of receipt of a notice issued in this regard, and such period may be extended by a further period not exceeding thirty days. The new section 92E seeks to provide that every person who has entered into an international transaction during a previous year shall obtain a report of an accountant and furnish such report on or before the specified date in the prescribed form and manner. The new section 92F defines the expressions “accountant”, “Arm’s length price”, “enterprise”, “specified date” and “transaction” used in the proposed new sections 92, 92A, 92B, 92C, 92D, 92E.”

15. A reference has been made in the petition to a circular issued by the CBDT dated 23.8.2001 being Circular No.12 (Annexure P-3), inter-alia, stating as under:-

“The aforesaid provisions have been enacted with a view to provide statutory framework which can lead to computation of reasonable, fair and equitable profit and tax in India so that the profits chargeable to tax in India do not get diverted elsewhere by altering the prices charged and paid in intra-group transactions leading to erosion of our tax revenues.”

16. We may now refer to contentions raised on behalf of the parties.

17. Learned counsel for the petitioner reiterated the submissions made in the writ petition and submitted that unamended Section 92 of the Act being not applicable to a nonresident for the period relevant to assessment years from 1998-99 to 2001-02 and notice under Section 148 of the Act being based on order of Transfer Pricing Officer, the said notices were liable to be quashed. With reference to period for and after assessment year 2002-03, it was submitted that Chapter X of the Act could not be made applicable to a case where both the parties to transaction were subject to jurisdiction of taxing authority in India in respect of the transaction and when there was no material to show that the profits were sought to be diverted out of India. It was submitted that literal interpretation could not be placed on provisions of Chapter X, which should be read in the context of the objects as manifested in the Statement of Objects and Reasons, the Finance Minister’s speech and the Circular. Reliance has been placed on judgments of the Hon’ble Supreme Court in K.P. Varghese v. I.T.O. (1981) 131 ITR 597, Commissioner of Income Tax (Central) v. B.N. Bhattacharjee and another (1979) 4 SCC 121, Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd. and others (1987) 1 SCC 424, DIT (International Taxation), Mumbai v. Morgan Stanley & Co. Inc. (2007) 7 SCC 1 AIT-2007-246-SC and judgment of Delhi High Court in Sony India P. Ltd. v. Central Board of Direct Taxes and another (2007) 288 ITR 52 and judgment of Bombay High Court in SGS India Pvt. Ltd. v. Assistant Commissioner of Income-tax AIT-2007-72-HC and another Writ Petition No.3166 of 2006. Learned counsel also submits that the view taken in K.P. Varghese (supra) has been followed in B.R. Enterprises v. State of U.P. and others (1999) 9 SCC 700, Commissioner of Income Tax, Bombay and others v. Mahindra and Mahindra Limited and others (1993) 4 SCC 392 and Raipur 28 C.W.P. No.16681 of 2005 Development Authority v. Anupam Sahkari Griha Nirman Samiti and others (2000) 4 SCC 357.

18. In support of submissions that the petitioner was entitled to an opportunity of being heard, reliance was placed on judgment of the Hon’ble Supreme Court in Rajesh Kumar v. CIT 2007(2) SCC 187. It was submitted that opportunity had become all the more necessary in view of amendment w.e.f. 1.6.2007 vide Finance Act, 2007, amending Section 92CA (4) of the Act to the effect that order of the Transfer Pricing Officer would be final and binding on the Assessing Officer and the Assessing Officer has to determine the price in conformity with the order of the Transfer Pricing Officer. Prior to the amendment, the requirement was only to have regard to the order of the Transfer Pricing Officer and the Assessing Officer had discretion to pass order which may or may not be in conformity with the order of the Transfer Pricing Officer. It was also submitted that the petitioner may not be able to charge price over and above the one mentioned in the permission granted by the Reserve Bank of India under the provisions of FERA. It was also submitted that purely domestic transactions were already covered under the scheme of the Act and the provisions of Chapter X would have been unnecessary to that extent unless their applicability is restricted in the manner suggested on behalf of the petitioner.

19. It was also submitted that reading the provision, as applicable only to transaction in which one of the parties was not subject to jurisdiction of a taxing authority in India or to cases where there was allegation of profits being diverted out of India, was necessary to save the provision from being hit by Article 14 of the Constitution, by making discrimination inter-se similarly placed classes of persons only on the ground of a party to transaction being non-resident.

20. Learned counsel for the respondents submitted that inapplicability of unamended Section 92 of the Act to non-residents had no relevance for application of provision of reassessment of escaped income under Section 147 of the Act and thus, notice under Section 148 of the Act was perfectly valid, as the reasons given therein had nexus with escapement of income. Applicability of provision for reassessment required formation of opinion of escapement of income and such opinion could be formed on any relevant material subject to the statutory scheme of the Act. Material contained in the order of Transfer Pricing Officer was a relevant material which could be taken into account for formation of opinion for escapement of income. Apart from the said material, the Assessing Officer has also taken into account other material and at this stage, notice under Section 148 of the Act could not be interfered with unless it could be held that the reasons given in the notice were irrelevant or absurd and had no nexus with the opinion of escapement of income.

21. As regards contention against applicability of provisions of Chapter X, it was submitted that the provisions are clearly attracted to situations enumerated therein, namely there being international transaction as defined in Section 92B of the Act i.e. a transaction between two or more associated enterprises either or both of whom were nonresident in situations specified therein. The applicability of the said provisions could not be controlled by reference to Statement of Objects and Reasons or Finance Minister’s speech which could be referred to only for the purpose of ascertaining the history and object of the provisions and for not controlling their meaning. History or object of provisions may be relevant only if there is ambiguity in the meaning of a statutory provision. There could be no violation of Article 14 of the Constitution in reading the provisions as being applicable to situations contemplated in the Statute irrespective of there being no material to show diversion of profits outside India or erosion of tax. The very nature of transaction between associates could be a just and valid ground to scrutinize the transaction with a view to ensure that true value is declared in the transaction and there is no manipulation of the profit derived by a non-resident, particularly when nonresident is a multinational company which has capacity to manipulate financial transactions in its dealing with its own associates. It was only on realization that there may be possibility of true income not being disclosed in such a transaction that the arm’s length price concept and transfer pricing provisions were incorporated in the light of global experience and such provisions are found not only in India but also elsewhere. The assessee suffers no injustice in arm’s length price being determined, object of which is only to determine fair price of the transaction, which on account of close relationship between the parties may not be otherwise disclosed. There is legislative competence for enacting such a provision and such classification is not violative of Article 14 of the Constitution.

22. We may now refer to settled legal principles having bearing on the questions involved.

23. The Legislature has competence to provide for all incidental matters to effectuate charging provision of a taxing statute. Mechanism for assessment can include provision for dealing with possibility of evasion. Under Section 4 of the Act, the tax is on income and a provision can certainly be made to find out what is the true income which is exigible to tax. When income is derived or expenditure in respect of which deduction is claimed, is in respect of transaction between parties having fiduciary relationship, provisions can be made to lay down objective parameters instead of giving finality to the declaration by the assessee.

24. The Legislature best understands needs of the people and how best the policy of taxation can be advanced. More elasticity is permissible to Legislature in taxing Statutes and it may be open to the Legislature to deal with apparently overlapping situations by different provisions.

25. Though Article 14 of the Constitution applies even to a taxing Statute, it does not prevent Legislature from making classification having intelligible differentia and nexus with the object of classification.

26. Principles of interpretation are applied to ascertain the intention of the Legislature and though they are considered to be good servants, they are bad masters. Intention of Legislature is best understood from the language used, which is the golden rule of interpretation. Only when there is ambiguity or absurdity, external aids may be pressed into service. Statement of objects and reasons or the speech of the Finance Minister may be referred to, to ascertain the history and object, but cannot control meaning of a provision when language is clear and free from ambiguity.

27. Reference may be made to leading decisions of the Hon’ble Supreme court on the above mentioned settled propositions.

28. In Navinchandra Mafatlal v. CIT, AIR 1955 SC 58 = (1954) 26 ITR 758, dealing with the issue of interpretation of word “income” in the legislative entry, it was observed:-

“6. It should be remembered that the question before us relates to the correct interpretation of a word appearing in a Constitution Act which, as has been said, must not be construed in any narrow and pedantic sense. Gwyer, C.J. in In re The Central Provinces and Berar Act, 14 of 1938, (1939) FCR 18, observed at pp. 36-37 that the rules which apply to the interpretation of other statutes apply equally to the interpretation of a constitutional enactment subject to this reservation that their application is of necessity conditioned by the subject-matter of the enactment itself. It should be remembered that the problem before us is to construe a word appearing in Entry 54 which is a head of legislative power. As pointed out by Gwyer, C.J. in United Provinces v. Atiqa Begum (1940) FCR 110, at p.134, none of the items in the Lists is to be read in a narrow or restricted sense and that each general word should be held to extend to all ancillary or subsidiary matters which can fairly and reasonably be said to be comprehended in it. It is, therefore, clear — and it is acknowledged by Chief Justice Chagla — that in construing an entry in a List conferring legislative powers the widest possible construction according to their ordinary meaning must be put upon the words used therein. Reference to legislative practice may be admissible for cutting down the meaning of a word in order to reconcile two conflicting provisions in two legislative Lists as was done in C.P. and Berar Act case or to enlarge their ordinary meaning as in State of Bombay v. F.N. Balsara,(1951) 2 SCR 682. The cardinal rule of interpretation, however, is that words should be read in their ordinary, natural and grammatical meaning subject to this rider that in construing words in a constitutional enactment conferring legislative power the most liberal construction should be put upon the words so that the same may have effect in their widest amplitude.

(underlining supplied).

 29. Again in Navnit Lal C.Javeri v. CIT, AIR 1965 SC 1375 = (1965) 56 ITR 198, dealing with the issue of power of legislature, to overcome device of tax evasion, it was observed:-

“16. The question which now arises is, if the impugned section treats the loan received by a shareholder as a dividend paid to him by the company, has the legislature in enacting the section exceeded the limits of the legislative field prescribed by the present Entry 82 in List I? As we have already noticed, the word “income” in the context must receive a wide interpretation; how wide it should be it is unnecessary to consider, because such an enquiry would be hypothetical. The question must be decided on the facts of each case. There must no doubt be some rational connection between the item taxed and the concept of income liberally construed. If the legislature realises that the private controlled companies generally adopt the device of making advances or giving loans to their shareholders with the object of evading the payment of tax, it can step in to meet this mischief, and in that connection, it has created a fiction by which the amount ostensibly and nominally advanced to a shareholder as a loan is treated in reality for tax purposes as the payment of dividend to him. We have already explained how a small number of shareholders controlling a private company adopt this device. Having regard to the fact that the legislature was aware of such devices, would it not be competent to the legislature to devise a fiction for treating the ostensible loan as the receipt of dividend? In our opinion, it would be difficult to hold that in making the fiction, the legislature has travelled beyond the legislative field assigned to it by Entry 82 in List I.”

(Underlining supplied).

30. In Keshavji Ravji & Co. v. CIT, (1990) 2 SCC 231: AIR 1991 SC 1806 (1990) 183 ITR 1, dealing with a similar issue, it was observed:-

“11…..Section 40(b), it is true, seeks to prevent the evasion of tax by diversion of the profits of a firm; but the legislative expedience adopted to achieve that objective requires to be given effect on its own language. Section 40 opens with the non-obstante clause and directs that certain outgoings specifically enumerated in it “shall not be deducted” in computing the income chargeable under the head “profits and gains of business or profession”.

As long as there is no ambiguity in the statutory language, resort to any interpretative process to unfold the legislative intent becomes impermissible. The supposed intention of the legislature cannot then be appealed to to whittle down the statutory language which is otherwise unambiguous. If the intendment is not in the words used it is nowhere else. The need for interpretation arises when the words used in the statute are, on their own terms, ambivalent and do not manifest the intention of the legislature.

In Doypack Systems Pvt. Ltd. v. Union of India 1988 (2) SCC 299 it was observed: (SCC pp. 331-32, paras 58 and 59)

“The words in the statute must, prima facie, be given their ordinary meanings. Where the grammatical construction is clear and manifest and without doubt, that construction ought to prevail unless there are some strong and obvious reasons to the contrary….”

“It has to be reiterated that the object of interpretation of a statute is to discover the intention of the Parliament as expressed in the Act. The dominant purpose in construing a statute is to ascertain the intention of the legislature as expressed in the statute, considering it as a whole and in its context. That intention, and therefore the meaning of the statute, is primarily to be sought in the words used in the statute itself, which must, if they are plain and unambiguous, be applied as they stand.”

(emphasis supplied)

12. Artificial and unduly latitudinarian rules of construction which, with their general tendency to “give the tax payer the breaks”, are out of place where the legislation has a fiscal mission. Indeed, taxation has ceased to be regarded as an “impertinent intrusion into the sacred rights of private property” and it is now increasingly regarded as a potent fiscal tool of State policy to strike the required balance — required in the context of the felt needs of the times — between citizen’s claim to enjoyment of his property on the one hand and the need for an equitable distribution of the burdens of the community to sustain social services and purposes on the other. These words of Thomas M. Cooley in Law of Taxation, Vol. 2 are worth mentioning: “Artificial rules of construction have probably found more favour with the courts than they have ever deserved. Their application in legal controversies has oftentimes been pushed to an extreme which has defeated the plain and manifest purpose in enacting the laws. Penal laws have sometimes had all their meaning construed away and in remedial laws, remedies have been found which the legislature never intended to give. Something akin to this has befallen the revenue laws….

(emphasis supplied)

xx xxx xxx xxxx

27…….The set-off in this case is, no doubt, the result of a statutory provision. In the case of partners, the special legal incidents of their relationship would substitute for the statutory provision and govern the situation. Indeed, even the idea of a set-off itself, which presupposes a duality of entities, may be out of place in the very nature of the relationship between a firm and its partners where the former is a mere compendious reference to the latter. But even to the extent the income tax law which identifies the firm as a distinct entity and unit of assessment goes, the idea of set-off may be invoked in view of the mutuality implicit in the putative duality inherent in deeming the firm as a distinct entity under the Act for certain purposes. The fiction may have to be pushed to its logical conclusions.”

31. In R.S. Joshi v. Ajit Mills Limited, AIR 1977 SC 2279, a Bench of seven Judges of the Hon’ble Supreme Court approved the observations in earlier judgment in R. Abdul Quader and Co. v. Sales Tax Officer, 2 n d Circle, Hyderabad, AIR 1964 SC 922:-

“20….All powers necessary for levy and collection of the tax concerned and for seeing that the tax is not 39 C.W.P. No.16681 of 2005 evaded are comprised within the ambit of the legislative entry as ancillary or incidental…”

32. In State of Gujarat v. Mirzapur Moti Kureshi Kassab Jamat, (2005) 8 SCC 534 = AIR 2006 SC 212, it was observed:-

“Question – 4: Statement of Objects and Reasons – Significance and Role thereof

69..Reference to the Statement of Objects and Reasons is permissible for understanding the background, antecedent state of affairs in relation to the statute, and the evil which the statute was sought to remedy. (See – Principles of Statutory Interpretation by Justice G.P. Singh, 9th Edition, 2004, at p.218). In State of West Bengal v. Subodh Gopal Bose and Ors., 1954 SCR 587, the Constitution Bench was testing the constitutional validity of the legislation impugned therein. The Statement of Objects and Reasons was used by S.R. Das, J. for ascertaining the conditions prevalent at that time which led to the introduction of the Bill and the extent and urgency of the evil which was sought to be remedied, in addition to testing the reasonableness of the restrictions imposed by the impugned provision. In his opinion, it was indeed very unfortunate that the Statement of Objects and Reasons was not placed before the High Court which would have assisted the High Court in arriving at the right conclusion as to the reasonableness of the restriction imposed. State of West Bengal v. Union of India, (1964) 1 SCR 371, 431-32 approved the use of Statement of Objects and Reasons for the purpose of understanding the background and the antecedent state of affairs leading upto the legislation.

70. In Quareshi-I itself, which has been very strongly relied upon by the learned counsel for the respondents before us, Chief Justice S.R. Das has held :-

“Pronouncements of this Court further establish, amongst other things, that there is always a presumption in favour of the constitutionality of an enactment and that the burden is upon him, who attacks it, to show that there has been a clear violation of the constitutional principles. The Courts, it is accepted, must presume that the legislature understands and correctly appreciates the needs of its own people, that its laws are directed to problems made manifest by experience and that its discriminations are based on adequate grounds. It must be borne in mind that the legislature is free to recognise degrees of harm and may confine its restrictions to those cases where the need is deemed to be the clearest and finally that in order to sustain the presumption of constitutionality the Court may take into consideration matters of common knowledge, matters of common report, the history of the times and may assume every state of facts which can be conceived existing at the time of legislation. (Para 15).

The legislature is the best judge of what is good for the community, by whose suffrage it comes into existence….”.

This should be the proper approach for the court but the ultimate responsibility for determining the validity of the law must rest with the court.” (Para 21, also see the several decisions referred to therein).”

33. In the field of economic activities, higher flexibility has to be allowed to the policy makers. As held by the Hon’ble Supreme Court in the case of R. K. Garg v. Union of India and others, (1981) 4 SCC 676, play in joints has to be allowed to deal with the complex problems, which do not admit solution through any doctrinaire or strait-jacket formula. In State of West Bengal v. Kesoram Industries Ltd., AIR 2005 SC 1646, after referring to the judgment of Hon’ble Supreme Court in the case of R. K. Garg (supra), the Hon’ble Supreme Court reiterated the observation of Frankfuter, J. in Morey v. Daud, (1957) 354 US 457, to the following effect:-

“In the utilities, tax and economic regulation cases, there are good reasons for judicial self-restraint if not judicial deference to legislative judgment. The legislature after all has the affirmative responsibility. The Courts have only the power to destroy not to reconstruct. When these are added to the complexity or economic regulation, the uncertainty, the liability to error, the bewildering conflict of the experts, and the number of times the judges have been overruled by events, selflimitation can be seen to be the path to judicial wisdom and institutional prestige and stability.”

“Their Lordships further observed that the Courts ought to adopt a pragmatic approach in solving problems rather than measuring the propositions by abstract symmetry. The exact wisdom and nice adaptations of remedies may not be possible. Even crudities and inequities have to be accommodated in complicated tax and economic legislations.”

 34. Reference may also be made to Section 64 of the Act which provides for clubbing the income of a spouse or a child to the income of an assessee.

35. In Aswini Kumar Ghose v. Arabinda Bose, AIR 1952 SC 369, it was observed:-

“32. As regards the propriety of the reference to the Statement of objects and reasons, it must be remembered that it seeks only to explain what reasons induced the mover to introduce the Bill in the House and what objects he sought to achieve. But those objects and reasons may or may not correspond to the, objective which the majority of members had in view when they passed it into law. The Bill may have undergone radical changes during its passage through the House or Houses, and there is no guarantee that the reasons which led to its introduction and the objects thereby sought to be achieved have remained the same throughout till the Bill emerges form the House as an Act of the Legislature, for they do not form part of the Bill and are not voted upon by the members. We, therefore, consider that the Statement of objects and reasons appended to the Bill should be ruled out as an aid to the construction of a statute.”

36. The above observations have been followed, inter-alia, in MK Ranganathan and another v. Govt. of Madras and others, AIR 1955 SC 604, Gujarat University v. Shri Krishna, AIR 1963 SC 703, Gurudevdatta VKSSS Maryadit v. State of Maharashtra”AIR 2001 SC 1980, Para 18 and Raymond Limited and another v. State of Chhattisgarh and others, AIR 2007 SC 2854.

37. In MK Ranganathan (supra), it was observed:-

“19. The statement of objects and reasons is certainly not admissible as an aid to the construction of a statute. But it can be referred to for the limited purpose of ascertaining the conditions prevailing at the time which actuated the sponsor of the Bill to introduce the same and the extent and urgency of the evil which he sought to remedy: ‘State of West Bengal v. Subodh Gopal Bose, AIR 1954 SC 92 at pp. 104-105 (D)…..”

38. In Shri Krishna, it was observed:-

“19……Statements of Objects and Reasons of a Statute may and do often furnish valuable historical material in ascertaining the reasons which induced the Legislature to enact a Statute, but in interpreting the Statute they must be ignored….”

39. In Raymond Limited (supra), it was observed:-

“30. We, however, accept that if the meaning of the provision of a statute is clear and explicit, it is not necessary to advert to the objects and reasons thereof in view of the decisions of this Court in Aswini Kumar Ghose v. Arabinda Bose (1953 SCR 1) and State of WB v. Union of India, (1964) 1 SCR 371, as by taking recourse to the statement of objects and Reasons, the generality of the words used in the statute cannot be cut down. It is axiomatic that an extended meaning thereof also cannot be given…”

40. Reference may also be made to Mathuram Agrawal v. State of M.P., AIR 2000 SC 109, wherein it was observed:-

“11……The intention of the legislature in a taxation statute is to be gathered from the language of the provisions particularly where the language is plain and unambiguous. In a taxing Act it is not possible to assume any intention or governing purpose of the statute more than what is stated in the plain language. It is not the economic results sought to be obtained by making the provision which is relevant in interpreting a fiscal statute. Equally impermissible is an interpretation which does not follow from the plain, unambiguous language of the statute. Words cannot be added to or substituted so as to give a meaning to the statute which will serve the spirit and intention of the legislature…..

12. In the case of Bank of Chettinad Ltd. v. Commr. of Income-tax, Madras, (AIR 1940 PC 183), the Privy Council quoted with approval the following passage from the opinion of Lord Russel of Killowen in Inland Revenue Commissioners v. Duke of Westminster, (1936) AC 1 :

“I confess that I view with disfavour the doctrine that in taxation cases the subject is to be taxed if in accordance with a Court’s view of what it considers the substance of the transaction, the Court thinks that the case falls within the contemplation or spirit of the statute. The subject is not taxable by inference or by analogy, but only by the plain words of a statute applicable to the facts and circumstances of his case. As Lord Cairns said many years ago in (1869) 4 HL 100 (2) at p. 122:

“As I understand the principle of all fiscal legislation it is this” If the person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however, apparently within the spirit of the law the case might otherwise appear to be.”

41. We may also refer to the judgments relied upon on behalf of the petitioner to see whether any different law has been laid down therein.

42. In K.P. Varghese v. ITO, (1981) 4 SCC 173: (1981) 131 ITR 597: AIR 1981 SC 1922, question was of interpretation of section 52 of the Act. It was held that literal interpretation resulted in absurdity and thus, the said provision was held to be applicable where there was undervaluation. The relevant observations are:-

“5……The task of interpretation of a statutory enactment is not a mechanical task. It is more than a mere reading of mathematical formulae because few words possess the precision of mathematical symbols. It is an attempt to discover the intent of the legislature from the language used by it and it must always be remembered that language is at best an imperfect instrument for the expression of human thought and as pointed out by Lord Denning, it would be idle to expect every statutory provision to be “drafted with divine prescience and perfect clarity”. We can do no better than repeat the famous words of Judge Learned Hand when he laid: “… it is true that the words used, even in their literal sense, are the primary and ordinarily the most reliable, source of interpreting the meaning of any writing: be it a statute, a contract or anything else. But it is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary; but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning.”

(underlining supplied).

6. The primary objection against the literal construction of Section 52 sub-section (2) is that it leads to manifestly unreasonable and absurd consequences. It is true that the consequences of a suggested construction cannot alter the meaning of a statutory provision but they can certainly help to fix its meaning. It is a wellrecognised rule of construction that a statutory provision must be so construed, if possible, that absurdity and mischief may be avoided……”

43. The above observations do not show any departure from the rule of interpretation according to the words used except where there is ambiguity or absurdity.

44. There is, thus, no departure from the settled principle that primary rule of construction is the language used and in case of ambiguity or absurdity, meaning consistent with object and purpose of a statute has to be assigned without doing violence to the statute. Statement of objects can be referred to find out the history and object of the statute and does not control the interpretation when language is clear. We are unable to read the judgments relied upon to the contrary.

45. We now deal with questions framed in para 10 above.

Re: Q. No.(i)

46. Objection of learned counsel for petitioner, as already mentioned above, is two fold:

(a)        Reference to Inapplicable provision of Section 92 of the Act as it stood prior to amendment w.e.f. 1.4.2002 and

(b)        irrelevance of order of the Transfer Pricing Officer under Chapter X passed in respect of a subsequent assessment year.

47. We have already reproduced Section 147 of the Act above and its applicability requires formation of opinion that income escaped assessment. The said provision is not in any manner controlled by Section 92 of the Act nor there is any limit to consideration of any material having nexus with the opinion on the issue of escapement of assessment of income. Interference with the notice for reassessment is called for only where extraneous or absurd reasons are made the basis for opinion proposing to reassess. Apart from the fact that the Assessing Officer has given other reasons, it cannot be held that the material relied upon by the Assessing Officer for proposing reassessment is irrelevant. Whether or not the said material should be finally taken into account for reassessment is a matter which has to be left open to be decided by the Assessing Officer after considering the explanation of the assessee. We can only mention that having regard to relationship of the petitioner to its associate company, it cannot be claimed that the price mentioned by it must be accepted as final and may not be looked at by the Assessing Officer.

48. In Raymond Woollen Mills Limited v. ITO and others, (1999) 236 ITR 34, while dealing with the question of interference with a notice of re-assessment by a writ court, it was observed:-

“In this case, we do not have to give a final decision as to whether there is suppression of material facts by the assessee or not. We have only to see whether there was prima facie some material on the basis of which the department could reopen the case. The sufficiency or correctness of the material is not a thing to be considered at this stage. We are o the view that the court cannot strike down the reopening o the case in the facts of this case. It will be open to the assessee to prove that the assumption of facts made in the notice was erroneous. The assessee may also prove that no new facts came to the knowledge of the Income Tax Officer after completion of the assessment proceeding. We are not expressing any opinion on the merits of the case. The questions of fact and law are left open to be investigated and decided by the assessing authority. The appellant will be entitled to take all the points before the assessing authority. The appeals are dismissed. There will be no order as to costs.”

49. In Phool Chand Bajrang Lal, M/s. v. Income-tax Officer, AIR 1993 SC 2390, it was observed:-

“From a combined review of the judgments of this Court, it follows that an Income-tax Officer acquires jurisdiction to reopen assessment under S. 147(a) read with S. 148 of the Income-tax Act, 1961 only if on the basis of specific, reliable and relevant information coming to his possession subsequently, he has reasons which he must record, to believe that by reason of omission or failure on the part of the assessee to make a true and full disclosure of all material facts necessary for his assessment during the concluded assessment proceedings, any part of his income, profit or gains chargeable to income-tax has escaped assessment. He may start reassessment proceedings either because some fresh facts come to light which were not previously disclosed or some information with regard to the facts previously disclosed comes into his possession which tends to expose the untruthfulness of those facts. In such situations, it is not a case of mere change of opinion or the drawing of a different inference from the same facts as were earlier available but acting on fresh information. Since, the belief is that of the Income-tax Officer, the sufficiency of reasons for forming the belief, is not for the Court to judge but it is open to an assesse to establish that there in fact existed no belief or that the belief was not at all a bona fide one or was based on vague, irrelevant and nonspecific information. To that limited extent, the Court may look into the conclusion arrived at by the Income-tax Officer and examine whether there was any material available on the record from which the requisite belief could be formed by the Income-tax Officer and further whether that material had any rational connection or a live link for the formation of the requisite belief. It would be immaterial whether the Income-tax Officer at the time of making the original assessment could or, could not have found by further enquiry or investigation, whether the transaction was genuine or not, if on the basis of subsequent information, the Income-tax Officer arrives at a conclusion, after satisfying the twin conditions prescribed in S. 147(a) of the Act, that the assessee had not made a full and true disclosure of the material facts at the time of original assessment and therefore income chargeable to tax had escaped assessment. The High Courts which have interpreted Burlop Dealer’s case (AIR 52 C.W.P. No.16681 of 2005 1971 SC 1635) (supra) as laying down law to the contrary fell in error and did not appreciate the import of that judgment correctly.”

50. We thus, answer question No.(i) against the petitioner and in favour of the respondents and hold that there is no infirmity in the notice proposing reassessment. The Assessing Officer will be at liberty to pass an appropriate order of assessment, subject to the rights and remedies of the assessee.

Re: Q. No.(ii)

51. As regards the question whether order of the Transfer Pricing Officer could be taken into account, we do not find any objection to the same being done. As already observed, requirement of Section 147 of the Act is fulfilled if the Assessing Officer can legitimately form an opinion that income chargeable to tax has escaped assessment. For forming such opinion, any relevant material can be considered. Order of Transfer Pricing Officer can certainly have nexus for reaching the conclusion that income has been incorrectly assessed or has escaped assessment. In the present case, the said material came to the notice of the Assessing Officer subsequent to the assessment. There is no grievance that provisions of Sections 148 to 153 of the Act have not been followed. In such a situation, it cannot be held that the notice proposing reassessment is vitiated merely because one of the reasons referred to order of Transfer Pricing Officer.

Re: Q. No. (iii)

52. We have already reproduced the amended provisions of Chapter X. According to the petitioner, the same should be held to be inapplicable, as making the same applicable will render them unconstitutional. The petitioner has not challenged their validity. We do not find any substance in the submission that if the said provisions are made applicable to the petitioner, the same would be unconstitutional. There is no lack of Legislative competence for enacting the said provisions and making them applicable to the petitioner or to a class of persons falling in the category of the petitioner. Potential of multinational companies to allocate profits in intra groups transactions to outside jurisdiction or resulting in tax evasion is an acknowledged fact and is duly recognized in Legislation, not only in India but elsewhere also. Keeping in view this mischief to be remedied and to advance the object of taxing the real income, provisions have been enacted. The amended provisions certainly advance the declared object by laying down the requirement of and mechanism for determination of arm’s length price.

‘International transaction’ and ‘associated enterprises’ have been well defined under Sections 92B and 92A of the Act. International transaction is a transaction between two or more associated enterprises, either or both of whom are non-residents. Associated enterprise is an enterprise which participates in management or control of capital or other gains. The provision for computing arm’s length price has been applied to income arising from international transactions. The Statute is, thus, applicable to well defined class which meets the test of intelligible differentia. It also meets the test of rational relationship to the object i.e. to determine the real income. The income arising from international transaction is to be computed having regard to arm’s length price as per guidelines laid down in Section 92C of the Act by adopting one of the laid down methods, at the discretion of the competent authority. Mere fact that the assessee has chosen one of the said methods, does not take away the discretion to select any other method which may be considered to be more appropriate for the purpose of determining the true income. Proviso to Section 92C (3) of the Act provides for an opportunity to the assessee as to why arm’s length price should not be determined as proposed. Under Section 92CA of the Act, the Assessing Officer can make a reference on the issue of computation of arm’s length price to a Transfer Pricing Officer. The Transfer Pricing Officer is required to issue notice to the assessee to lead evidence for determining what was the arm’s length price.

53. We do not find any ambiguity or absurd consequence of application of Chapter X to persons who are subject to jurisdiction of taxing authorities in India nor we find any statutory requirement of establishing that there is transfer of profits outside India or that there is evasion of tax. Only condition precedent for invoking provisions of Chapter X is that there should be income arising from international transaction and such income has to be computed having regard to arm’s length price.

“International transaction” as defined under Section 92B of the Act, as already observed, certainly stands on different footing than any other transaction. Arm’s length price is nothing but a fair price which would have been normal price. There is always a possibility of transaction between a non resident and its associates being under-valued and having regard to such tendency, a provision that income arising out of said transaction could be computed having regard to arm’s length price, will not be open to question and is within the legislative competence to effectuate the charge of taxing real income in India.

54. We, thus, do find any merit whatsoever in the contention that provisions of Chapter X cannot be made applicable to parties which are subject to jurisdiction of taxing authorities in India, without there being any material to show transfer of profits outside India or evasion of tax between the two parties. The contention that according to the permission granted by the Reserve Bank of India under the FERA, the assessee cannot charge more than particular price, can also not control the provisions of the Act, which provides for taxing the income as per the said provision or computation of income, having regard to arm’s length price in any international transaction, as defined.

55. The judgment on interpretation of Statutes in K.P. Varghese (supra) does not in any manner help the petitioner. The applicability of the provisions to the petitioner is very much consistent with the object. The language cannot be controlled or limited by the objects of preventing tax evasion or of preventing transfer of profits outside India as per any other notion except the manner statutorily laid down. The language being clear, the provisions will be attracted to an international transaction i.e. a transaction between two associated enterprises at least one of whom is not resident, having price less than arm’s length price.

56. As regards judgment of the Bombay High Court in SGS India Pvt. Ltd. (supra), we do not find any relevance thereof to the present case, as the question is that of applicability of Chapter X to the period prior to 1.4.2002. Similarly, the judgment of Delhi High Court in Sony India P. Ltd. (supra), is also not relevant to the issue involved herein as the same dealt with circular prescribing making of reference to the Transfer Pricing Officer mandatory if amount of transaction was beyond specified limit.

Re: Q. No. (iv)

57. The grievance on behalf of the petitioner that there is denial of opportunity, at the stage of making reference under Section 92 CA of the Act, has no merit. The decision to make a reference does not in any manner visit the assessee with any civil consequence. The decision is to be taken by the Assessing Officer having regard to the question whether it will be proper for the Assessing Officer himself to determine the arm’s length price or it will be expedient to have it determined from the Transfer Pricing Officer. There is safeguard of seeking prior approval of the Commissioner. Whether computation of arm’s length price is made by one officer or by the other, does not in any manner affect the assessee. Even though the Assessing Officer may, in view of latest amendment be bound by the computation by the Transfer Pricing Officer, the assessee has opportunity to challenge the same at higher levels as per hierarchy laid down in the Statute. Even earlier, the assessee is given due opportunity by the Transfer Pricing Officer. There is thus no difference, as far as opportunity is concerned, whether computation is made by the Assessing Officer himself or by the Transfer Pricing Officer. No doubt quasi judicial authorities are expected to act as per principles of natural justice in all matters, it depends on context of a statutory provision whether opportunity is sufficient. Even in absence of any statutory provision, requirement of giving an opportunity can be inferred if a person is adversely affected. When it is a matter of assessment by one or other officer and the assessee is to be provided opportunity, in the course of the assessment, we do not find any merit for inferring further opportunity at the stage of decision of the question, whether the Assessing Officer himself is to compute the arm’s length price or to make a reference to the Transfer Pricing Officer for the said purpose.

58. All the questions framed in para 10 above having been decided against the petitioner, we do not find any merit in the writ petition.

59. Accordingly, the writ petition is dismissed.

NF