Case Law Details
JRS Pharma and Gujarat Microwax Private Limited Vs DCIT (Gujarat High Court)
Question of law: whether the revenue is justified in reopening the assessment for the year under consideration?
Writ application filed before the Hon’ble HC of Gujrat challenging notice u/s 148 of the Income Tax Act, 1961 for reopening the assessment for AY 2013-14.
During the FY 2012-13, the assessee company had entered into various international transactions with its associated enterprises for which the company had duly furnished Form 3CEB as required under Section 92E of the Act determining the Arm’s Length Price (‘ALP’) of the international transactions entered with its associated enterprises.
During the assessment proceeding, the assessee company submitted all the details/information as required by the AO. After perusing various details/information, the AO passed an assessment order u/s.143(3) and assessed the income after disallowing the commission paid to non-resident. During the course of scrutiny proceedings, AO did not refer the matter to the TPO by relying on instructions No.3/2016 dated 10.03.2016.
Thereafter, the AO reopened the assessment for A.Y 2013-14 by issuing notice u/s 148 read with Section 147 of the Act. The reason recorded by the AO for reopening the assessment was delayed submission of the revised reports.
On the aforementioned reason for reopening the assessment, Hon’ble High Court, after considering facts and material available in record, opined that observations recorded by the AO are factually incorrect and contrary to the material evidence on record.
In the light of the judgement of Hon’ble Supreme Court in the case of CIT Vs. Kelvinator of India Ltd. [(2010) 2 SCC 723] and facts of the present case, Hon’ble HC held that the issuance of notice to reopen the assessment is nothing, but a change of opinion and mere a change of opinion cannot be the basis of reopening the completed assessment unless the AO found tangible material. Thus, Section 147 of the Act does not postulate conferment of power upon the AO to initiate reassessment proceedings on his change of opinion.
This judgement reaffirm the principle that mere a change of opinion cannot be the basis of reopening the completed assessment.
FULL TEXT OF THE JUDGMENT/ORDER of GUJARAT HIGH COURT
1. By filing this writ application under Article 226 of the Constitution of India, the writ applicant – assessee company seeks to challenge the Notice dated 31.03.2018 issued by the respondent under Section 148 of the Income Tax Act, 1961 (‘the Act’ for short) seeking to reopen the writ applicant’s income tax assessment for the A.Y 2013-14.
2. The brief facts can be summarized as under:
i. The writ applicant – assessee Company is a company incorporated on 5th January, 1985 and is engaged in the business of manufacturing of pharmaceutical excipients like Micro Crystalline Cellusse Powder (MCCP), Crosscarmellose Sodium (CCS), Sodium Starch Giycolate (SSG) etc.
ii. During the F.Y 2012-13, the assessee company had entered into various international transactions with its associated enterprises for which the company had obtained an Accountant’s report in Form No. 3CEB under Section 92E of the Act determining the Arm’s Length Price (‘ALP’ for short) of the international transactions entered with its associated enterprises.
iii. The assessee Company filed its return of income on 16.09.2013 for the A.Y. 2013-14, declaring total income at Rs. 17,35,26,420/-. Initially, the case was processed under Section 143(1) of the Act and thereafter, was selected for scrutiny assessment and accordingly, on 18.03.2016, assessment was framed under Section 143(3) of the Act determining total income Rs.17,89,32,690/- disallowing the expenditure of commission expenses paid to nonresidence and the same had been added back to the total income.
iv. During the scrutiny proceedings, the AO had issued notice under Section 92(C) read with Section 142(1) of the Act dated 05.02.2016 for A.Y. 2013-14 and called for various details and information and the same was complied with by the assessee vide its letter dated 19.02.2016 (04.03.2016) and had furnished such details like Transfer Pricing Order for A.Y. 2012-13, copy of the original Transfer Pricing Study Report and Accountant’s Report in Form No. 3CEB and also submitted revised Transfer Pricing Study Report and Accountant’s report vide its letter dated 14.03.2016 (submitted on 18.03.2016) and after perusing various details/information, the AO passed an assessment order vide order dated 18.03.2016 under Section 143(3) of the Act and assessed the income at Rs.17,89,32,609/- after disallowing the commission paid to non-resident amounting to Rs.54,06,265/-. During the course of scrutiny proceedings, the AO did not refer the matter to Transfer Pricing Officer (TPO) by relying on instructions No.3/2016 dated 10.03.2016.
v. Thereafter, the AO reopened the assessment for A.Y 2013-14 by issuing impugned notice dated 31.03.2018 under Section 148 read with Section 147 of the Act. Pursuant to impugned notice, the assessee vide letter dated 11.04.2018 filed its return of income and by same letter, had requested the respondent to furnish copy of the reasons recorded for reopening of the assessment. The respondent vide letter dated 18.07.2018, supplied the copy of reasons recorded for reassessment. The assessee Company filed its detailed objections against the reassessment proceedings/reasons recorded vide its letter dated 01.08.2018 (07.08.2018). The objections came to be disposed of by the revenue vide its order dated 18.07.2018.
vi. The relevant portion of the reasons recorded by the AO for reopening of the assessment reads as under:
“i) Assessee company filed its return of income for AY 2013-14 on 16.09.2013 declaring income of Rs.17,35,26,420/-. The same was assessed under Sec. 143(3) and returned income was determined at Rs.17,89,32,690/- vide order dated 18.03.2016.
(ii) On perusal of the case records, it is seen that the assessee had various international transaction and it is also seen that average rate of sale of its products to its Associated Enterprises (AE’s) is much less than the rate at which it sells to other unrelated parties.
As regards to TP study, the assessee company vide its letter dated 19.02.2016 have shown that the preparation of the TP study for the FY 2012-13 is under progress and will be furnished later on. This TP study report was submitted by the assessee only after 14th March, 2016 because of which the AO could not refer the matter to the TPO nor could he examine the issue. In this view of the matter, the assessee had exported goods its AE’s at lower price then to other unrelated parties, I have reason to believe that income has escaped assessment.
(iii) In this case not more than four years have lapsed from the end of assessment year under consideration. Hence, necessary sanction to issue notice U/s 148 is obtained separately from the Joint Commissioner of Income-tax as per provision of Section 151 of the Act.
In view of the matter, | have reason to believe that income of Rs.7,40,57,709/- has escaped for the A.Y. 2013-14 in the spirit of provision of Section 147 of the Income Tax Act, 1964.”
3. Being aggrieved by the disposal of the objections against the notice for reopening of the assessment, the writ applicant has come up before this Court with the present writ application.
4. We have heard Mr. Saurabh Soparkar, learned Senior Counsel assisted by Mr.Bandish Soparkar, learned advocate appearing for the writ applicant and Mr. Manish Bhatt, learned Senior Counsel assisted by Mrs. Mauna Bhatt, learned Senior Standing Counsel appearing for the revenue.
5. Soparkar, learned Senior Counsel appearing for the writ applicant raised the following contentions:
i. It was submitted that the impugned notice is bad in law and without jurisdiction as the conditions precedent for initiation of the reassessment proceedings are not complied with and therefore, impugned notice is bad in law and required to be quashed.
ii. The reasons recorded are erroneous. The AO has proceeded completely on wrong factual premise.
The reasons, therefore, lack validity. In this context, it was submitted that, the assessee Company had submitted its audit report in Form No.3CEB on 26.07.2013 and the same was filed online on 19.09.2013, which is evident that, there was no delay on the part of the assessee Company to submit the reports. It was further submitted that, during the course of scrutiny assessment proceedings, the copy of audit report and Transfer Pricing Study Report as sought for by the AO vide his letter dated 05.02.2016 had been submitted on 04.03.2016 and revised Form No.3CEB as well as Transfer Pricing Study Report were submitted on 18.03.2016. Thus, it clearly established that before completion of scrutiny proceedings, necessary information as sought was available with the AO and thereafter, the assessment order was completed under Section 143(3) of the Act on 18.03.2016. In this background facts, it was vehemently submitted that, while recording the reasons for reopening of assessment, the observations made by the AO that, non-submission of the Revised Accountant’s Report in Form No.3CEB and Transfer Pricing Study Report, the AO could not refer the matter to the Transfer Pricing officer nor he could examine the issue, are factually incorrect and contrary to the facts available on record and therefore, on this ground, the notice is bad in law and deserves to be quashed.
iii. Referring to the reasons record, learned Senior Counsel submitted that, at the relevant point of time i.e. for A.Y. 2013-14, the original Accountant’s Report in Form No.3CEB was submitted to the respondents disclosing all the internal transactions with its associated enterprises and during the course of scrutiny proceedings, the assessee company had supplied all the details and information as well as revised reports. Thus, it is evident on record that, the observations made in the reasons recorded that, the average rate of sales to its associated enterprises is less than the rate at which it sells to another related parties is baseless and without any basis and contrary to the material on record and there was complete non-application of mind on the part of the AO to the materials available on record, prior to reopening of the assessment. Thus, basic requirement of law to confer jurisdiction under Section 147 of the Act for reopening of assessment is not satisfied and on this ground, the notice deserves to be quashed.
iv. Placing reliance on the decision of the Apex Court in the case of CIT Vs. Kelvinator of India Ltd. [(2010) 2 SCC 723], it was submitted that, during the course of scrutiny assessment, all the necessary information with respect to international transactions were submitted by the assessee Company and all the materials like original Form No.3CEB, Transfer Pricing Study Report, revised Accountant’s Report and TPS report were available on record. However, the AO did not refer the issue to the Transfer Pricing Officer to determine the Arm’s Length Price and relying on the Circular consciously thought it fit not to determine the price or refer the matter to the Transfer Pricing Officer. Thus, present reassessment proceeding is nothing, but fresh application of mind to the same set of facts and therefore, mere a change of opinion does not confer jurisdiction on the AO to initiate proceedings for reassessment without tangible material available on record.
v. Lastly, it was submitted that in the reasons recorded, it is stated that income of Rs.7,40,57,709/- has escaped assessment for the year under consideration, however, in the reasons recorded, how and under what manner, the amount being arrived at by the AO that it has escaped assessment has not been precisely explained and therefore, the basis of issuance of the impugned notice itself is vague and bad in law.
6. In view of the aforesaid contentions, learned Senior Counsel for the writ applicant submitted that, the impugned notice as well as the order of disposing off the objections are without jurisdiction and therefore, the same deserve to be quashed and set aside and therefore, he prays to allow the present writ application.
7. On the other hand, Mr. Manish Bhatt, learned Senior Counsel assisted by Mrs. Mauna Bhatt, learned Senior Standing Counsel appearing for the revenue, reiterating the stand adopted by the respondent in the Affidavit in Reply as well as in order of disposing of the objections, submitted that the action taken by the AO is just, legal and proper and does not warrant any interference. It was further submitted that assessment has been reopened on the ground that the assessee Company had entered into various international transactions with its associated enterprises and the average rate of sales to its associated enterprises was much less than the rate at which it sells to other unrelated parties and therefore, it is evident that the Company has exported goods to its associated enterprises at a lower price and therefore, after considering the available material on record, the AO formed a “reason to believe” that income has escaped assessment. Referring to the reasons recorded, it was submitted by learned Senior Counsel that at the relevant point of time, the then AO could not refer the matter to the Transfer Pricing Officer, nor could he examine the issue because of non-submission of revised Accountant’s Report in Form No.3CEB and Transfer Pricing Study Report. In these circumstances, it was contended that, the issue regarding transfer pricing was not adjudicated during the assessment proceedings and as such, no opinion on the issue being formed by the AO and therefore, the principles of change of opinion would not applicable to the facts of the present case.
8. In view of the aforesaid contentions made by the learned Senior Counsel for the revenue, it is prayed that, the present writ application being meritless, deserves to be dismissed.
9. Having heard learned counsel for the respective parties and having gone through the materials on record, the only question falls for our consideration is that, whether the revenue is justified in reopening the assessment for the year under consideration?
10. Before adverting to the rival contentions raised by the respective parties, it is relevant to refer to the provisions of Section 147 of the Act, which provides that, 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 of the Act, assess or reassess such income. In view of the aforesaid provisions, to confer jurisdiction under Section 147 of the Act, the primary condition to be satisfied is that, the AO must have reason to believe that the income chargeable to tax has escaped assessment.
11. In the facts of the present case, it appears that, the assessee Company had entered into various international transactions with its associated enterprises. Any income arising from international transaction shall be computed having regard to the Arm’s Length Price. Chapter X of the Act deals with the special provision relating to avoidance of tax. In view of the issue raised by the assessee company, it is relevant to refer to Sections 92, 92C and 92CA of the Act, which provide that, any income arising from an international transaction shall be computed having regard to the Arm’s Length Price, which shall be determined by the methods as prescribed under Section 92 C of the Act. Section 92CA refers to how and under what manner, the reference to Transfer Pricing Officer can be made. The section provides that, if the AO considers if necessary or expedient to do so, he may with the previous approval of the authority refer the computation of Arm’s Length Price in relation to the international transaction made under Section 92C to the Transfer Pricing Officer. Sub-section 2C of Section 92CA empower the AO either to assess or reassess under Section 147 or pass an order enhancing the assessment already made or otherwise increasing the liability of the assessee under Section 154 for any assessment year, proceedings for which have been completed before the 1st day of July, 2012.
12. In view of the statutory provisions and considering the facts of the case, it is not in dispute that, on 23.07.2013, the original Form No.3CEB under Section 92E of the Act determining the Arm’s Length Price of the international transactions entered into by the assessee with its associated enterprises had been submitted physically as well as online with the respondent within the time prescribed by the Act and thereafter, on 16.09.2013, return of income for the year A.Y. 2013-14 was filed and the same was processed under Section 143(1) of the Act and the case was selected for scrutiny assessment under Section 143(2) of the Act vide Notice dated 04.09.2014. It is also not in dispute that, during the course of proceedings, the AO had called for necessary information by issuing notice under Section 92C read with Section 142(1) of the Act dated 05.02.2016 for the A.Y. 2013-14 and the same was complied with by the assessee vide its letter dated 19.02.2016, whereby, the assessee had furnished a copy of the audit report in Form No.3CEB containing the complete details of international transactions and also submitted Transfer pricing Study report and thereafter, on 18.03.2016, the revised Transfer Pricing Study report and Accountant’s report were submitted and finally, the AO has framed the assessment vide its order dated 18.03.2016.
13. It is relevant to refer to the observations made by the AO in the assessment order. The relevant extracts of para 3 reads as under:-
“As per instruction No.3/2016 dated 10th March, 2016, which state in para 3.7 that for administering the transfer pricing regime in an efficient manner, it is clarified that though AO has the power under Section 92C to determine the ALP of international transactions or specified domestic transactions, determination of ALP should not be carried out at all by the AO in a case where reference is not made to the TPO. However, in such cases, the AO must record in the body of the assessment order that due to the Board’s instruction on this matter, the transfer pricing issue has not been examined at all. In accordance with the above instructions, the transfer pricing issue has not been examined at all.”
14. In the facts of the present case, it is necessary to refer to the Circular/instructions No.3/2016 dated 10.03.2016 issued by Central Board of Direct Taxes, which provides guidelines for implementation of the Transfer Pricing provisions. In the present case, relying para 3.7 of the instructions, the AO did not refer the issue to the Transfer Pricing Officer as provided under Section 92CA of the Act to determine the Arm’s Length Price under Section 92C of the Act. A bare reading of Clause 3.7 of the Circular/instructions shows that, if reference is not made to transfer Pricing Officer under Section 92C, then AO cannot determine the Arm’s Length Price and cannot examine transfer price issue. In other words, the AO did not exercise its discretion either to refer the issue to the Transfer Pricing Officer or decide the same from the material on record.
15. In the aforesaid background facts, it appears that, before completion of the scrutiny assessment, the original Accountant’s report in Form No.3CEB, Transfer Pricing Study report and revised reports thereof were available on record and it is evident that, the assessee had submitted it in a prescribed time limit. Thus, all the information with regard to international transactions entered into by the assessee with its associated enterprises were placed on record at the time of scrutiny assessment proceedings. On perusal of the reasons recorded, it appears that the AO has recorded to the effect that he could not refer the matter to the Transfer Pricing Officer nor could he examine the issue because of delayed submission of the revised reports. In our opinion, the observations recorded by the AO are factually incorrect and contrary to the material evidence on record. It is required to be noted that while framing the assessment order, it would not reflect that due to non-submission of revised Accountant’s report or Form No.3CEB, AO could not determine the Arm’s Length Price or refer the issue to the Transfer Pricing Officer. Thus, we find substance in the contention raised by the learned counsel for the writ applicant that, the reasons recorded are factually incorrect and without any basis. It is the admission on the part of the AO that, the reports as referred in the reasons recorded were received by him on 14.03.2016. If it is so, then the AO could have examined the revised reports to verify the sale transactions and average rate of sale, but, relying on the instructions, he did not either himself examined the issue of determination of Arm’s Length Price, nor referred to Transfer Pricing Officer. Thus, it was his conscious decision not to examine the issue. In these circumstances, reference can be made to the case of Commissioner of Income Tax Vs. Usha International Ltd., [(2012) 348 ITR 485], wherein, a full bench of the Delhi High Court held that, reassessment proceedings will be invalid in case an issue or query is raised and answered by the assessee in original assessment proceedings, but thereafter, the AO does not make any addition in the assessment order. In such situation, it should be accepted that the issue was examined, but the AO did not find any ground or reason to make addition or reject the stand of the assessee and he forms the opinion as a result, the reassessment will be invalid because the AO had formed an opinion in the original assessment, though he has not recorded his reasons.
16. In a case of CIT Vs. Kelvinator of India Ltd., the Apex Court while interpreting language of Section 147 of the Act, held that the assessing officer certainly has the power to reassess for any assessment year subject to the provisions of Sections 147 to 153 of the Act, however, the use of this power is conditional upon the fact that, the AO has some reason to believe that, the income has escaped assessment. The Apex Court has interpreted the use of words “reason to believe” and held that it has to be interpreted schematically as the liberal interpretation of the word would have the consequence of conferring arbitrary powers on the assessing officer who may even initiate such reassessment proceedings mainly on his change of opinion on the basis of same facts and circumstances, which has already been considered by him during the original assessment proceedings. In paras 5, 6 and 7, the Apex Court has held as under:-
“5. Where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to reopen the assessment. Therefore, post-1st April, 1989, power to re-open is much wider. However, one needs to give a schematic interpretation to the words “reason to believe” failing which, we are afraid, Section 147 would give arbitrary powers to the Assessing Officer to re-open assessments on the basis of “mere change of opinion”, which cannot be per se reason to re-open.
6. We must also keep in mind the conceptual difference between power to review and power to re-assess. The Assessing Officer has no power to review; he has the power to re-assess. But re-assessment has to be based on fulfillment of certain pre-condition and if the concept of “change of opinion” is removed, as contended on behalf of the Department, then, in the garb of re-opening the assessment, review would take place.
7. One must treat the concept of “change of opinion” as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1st April, 1989, Assessing Officer has power to re-open, provided there is “tangible material” to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief.”
17. In light of the settled legal principle and considering the facts of the present case, we are of the view that, the issuance of notice to reopen the assessment is nothing, but a change of opinion and mere a change of opinion cannot be the basis of reopening the completed assessment unless the AO found tangible material. Thus, Section 147 of the Act does not postulate conferment of power upon the AO to initiate reassessment proceedings on his change of opinion. In the present case, it is not the case of the Revenue that after completion of the assessment under Section 143(3) of the Act, the AO found any tangible material for reassessment of the proceedings. It is pertinent to note that, while recording the reasons, the AO did not explain the arithmetical calculation of Rs.7,40,57,709/-.
18. In view of the forgoing reasons, the reasons recorded for reassessment could not have led to formation of any belief that the income has escaped assessment within the meaning of Section 147 of the Act. Therefore, the impugned notice dated 31.03.2018 cannot sustainable and deserves to be quashed and set aside.
19. Resultantly, present writ application is allowed and the impugned Notice dated 31.03.2018 is hereby quashed.
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