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Case Law Details

Case Name : PCIT Vs L And T SUCG JV CC27 (Delhi High Court)
Appeal Number : ITA 518/2023
Date of Judgement/Order : 12/09/2023
Related Assessment Year :
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PCIT Vs L And T SUCG JV CC27 (Delhi High Court)

Introduction: The Delhi High Court recently rendered a significant judgment in the case of PCIT vs L&T SUCG JV CC27, addressing the question of whether government shareholders should be automatically considered related parties. The case pertains to the Assessment Year 2014-15 and revolves around a penalty order issued under Section 271AA of the Income Tax Act, 1961. This article delves into the details of the judgment, analyzing the key arguments and the court’s conclusions.

Detailed Analysis:

The appellant/revenue filed an appeal challenging the order of the Income Tax Appellate Tribunal (ITAT) dated 28.10.2020. The central issue before the Tribunal was the validity of the penalty order dated 27.09.2018, imposed on the respondent/assessee under Section 271AA of the Income Tax Act.

The penalty was linked to the respondent’s failure to report transactions related to the purchase of equipment from Shanghai Pudong Machinery Complete Equipment Co. Ltd. (SPMCEC L) under Section 92E of the Act. The Commissioner of Income Tax (Appeals) had upheld the penalty, emphasizing the non-disclosure and lack of record maintenance by the respondent.

Despite several additions to the assessed income of the respondent during scrutiny assessment, the Tribunal had earlier ruled, in the quantum proceedings, that the transaction with SPMCEC L was at arm’s length. This ruling formed the basis for challenging the penalty proceedings.

The Tribunal’s decision hinged on a thorough examination of the shareholding structure of the respondent, a joint venture between Larsen & Turbo (L&T) and Shanghai Urban Construction Group (SUCG). The Assessing Officer (AO) had concluded that the respondent failed to make necessary disclosures under Section 92E due to its shareholding structure.

However, the Tribunal adopted a nuanced approach, considering the dominant control exercised by L&T in the joint venture. It rejected the notion that government organizations holding shares necessarily classify transactions as related-party dealings. The court highlighted that such an interpretation would implicate various public sector undertakings and nationalized banks as related parties, merely due to government shareholding.

The article further explores the Tribunal’s reasoning, emphasizing the importance of considering the reasonable cause defense under Section 273B of the Act. This statutory provision absolves penalties if reasonable cause for the failure can be proven.

Conclusion:

In conclusion, the Delhi High Court upheld the Tribunal’s decision, dismissing the appeal. The judgment signifies a crucial precedent, clarifying that government shareholders do not automatically trigger related-party status. The court’s endorsement of the reasonable cause defense underlines the importance of assessing the circumstances leading to non-compliance. This article provides a comprehensive overview of the case, shedding light on its implications for taxation matters and establishing a nuanced understanding of related-party transactions involving government entities.

FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT

1. This is an application moved on behalf of the appellant/revenue, seeking condonation of delay in re-filing the appeal.

1.1 According to the appellant/revenue, there is a delay of 387 days.

2. Mr Satyen Sethi, counsel who appears on behalf of the respondent/assessee, says that he does not oppose the prayer made in the application.

3. Accordingly, the delay is condoned.

4. The application is disposed of, in the aforesaid terms.

Government Shareholders Not Automatically Considered Related Parties

ITA 518/2023

5. This appeal concerns Assessment Year (AY) 2014-15.

6. Via this appeal, the appellant/revenue seeks to assail the order dated 28.10.2020, passed by the Income Tax Appellate Tribunal [in short, “Tribunal”].

7. The only issue which arose for consideration before the Tribunal was whether or not the penalty order dated 27.09.2018, passed under Section 271AA o the Income Tax Act, 1961 [in short “The Act”] should be

8. The record shows that the Commissioner of Income Tax (Appeals) [in short, “CIT (A)”] had confirmed the penalty order.

8.1 The record also shows that the penalty was imposed on the respondent/assessee on the basis of the fact that it had neither reported the transaction concerning the purchase of equipment from an entity going by the name Shanghai Pudong Machinery Complete Equipment Co. Ltd. [hereinafter referred to as “SPMCEC L”] as required under Section 92E of the Act, nor maintained a record of the transaction, as per the provisions of Section 92D of the Act.

9. To be noted, the respondent/assessee was subjected to scrutiny assessment, and an assessment order was framed under Section 143(3) of the Act whereby, its assessed income was pegged at Rs. 297.18 crores.

10. The record also discloses that the respondent/assessee, which is a joint venture between Larsen & Turbo (L&T) and Shanghai Urban Construction Group (SUCG), was awarded a contract for the construction of an underground tunnel from Shankar Vihar Metro Station to Hauz Khas Metro Station, as well as construction of five metro stations i.e., at Vasant Vihar, Munirka, R.K. Puram, IIT, and Hauz Khas.

11. Although during scrutiny assessment several additions were made to the declared income of the respondent/assessee, which was Rs. 8.11 crores, the aspect concerning the transactions entered into with SPMCECL qua purchase of the tunnel boring machine turned in favour of the respondent/assessee, inasmuch as it was held by the Tribunal in the quantum proceedings that the transaction was at arm’s length. Thus, the addition concerning the purchase of a tunnel-boring machine was deleted.

11.1 The reason that we have referred to this aspect of the matter as it forms the foundation for triggering penalty proceedings against the respondent/assessee.

12. Furthermore, what is required to be noticed is that the quantum proceedings were fought right up to the Tribunal.

13. In sum, insofar as the addition made vis-à-vis the tunnel-boring machine is concerned, the conclusion drawn was that the transaction was at Arm’s Length Price.

14. The Assessing Officer (AO), however, based on the shareholding structure of the respondent/assessee, concluded that the assessee had not made disclosures, as required under Section 92E of the Act.

15. The Tribunal, in our opinion, while examining the veracity of the view taken both by the AO and the CIT(A), has adopted the correct approach.

16. Before we advert to what the tribunal has noted, it may be relevant to note the shareholding structure as recorded by the AO:

shareholding structure

17. A perusal of the chart would show that one of the joint venture partners i.e., SUCG, is controlled by the State Assets Supervision and Administration Commission [hereafter referred to as “SASAC”].

18. The record shows that SASAC holds 100% shares in SUCG. There is a downstream control by SASAC of SPMCECL.

19. The record also shows that the two joint venture partners i.e., L&T and SUCG holds shares in the ratio of 68:32 in SPMCECL.

20. L&T, thus, has a dominant control in the joint venture. Given this structure, in our view, the rationale adopted by the Tribunal is correct as is reflected in the following observations made in paragraph 14 of the impugned order:

“14. A perusal of the share holding structure which is exhibited page 4 and 5 at the order of the CIT(A) show that the share holders of Shanghai State Asset Supervision and Administration Commission and SPMCECL are Government organizations. Merely because the share holders are Government organizations would not conclude that these are related parties. In our view if we go by this logic then all the PSUs in India and all nationalized banks will be termed as related parties since the Government of India holds share in these Government undertaking.”

21. Besides this, as to whether SPMCECL was a related party is an issue qua which there can possibly be more than one view. The respondent/assessee has taken a stand that the legal advice that it received seems to indicate that it was not a related party. The CIT(A) has done its own analysis of the Chinese Law and concluded that it was a related party to the transaction and hence required disclosure.

22. One can only say that insofar as Chinese Law is concerned, it is a matter of fact which could only be ascertained, at the very least, by having an expert in Chinese Law being produced as a witness.

23. That apart, we agree with Mr Sethi that the reasonable cause defence which is statutorily ingrained in Section 273B of the Act, perhaps, is the basis of the conclusion reached by the Tribunal.

23.1 Section 273B of the Act, which refers to various penalty provisions, [including Section 271AA] clearly provides that no penalty is imposable on the person or the assessee, as the case may be, for any failure referred to in the said provisions, if he proves there was a reasonable cause for the said failure.

24. As indicated above, the Tribunal, in our opinion, has taken recourse to the correct approach.

25. We find no difficulty in accepting the view taken by the Tribunal.

26. Accordingly, the appeal is closed as according to us no substantial question of law arises for our consideration.

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