The basic proposition, which is on a question of law, of relevance for discussion of the chosen Topic herein is THIS:
The Income Tax Act (the Act) has to be read as an integrated whole. Further, any section / enactment laying down the machinery for computing ‘chargeable- income’ from a transaction (SOURCE OF INCOME) rather ought not but to, – be read and given effect de-hors the ‘charging’ section.
In other words, for invoking and giving effect to any machinery enactment- regardless of whether that is in respect of a ‘controlled’ or ‘uncontrolled’ transaction (within its legal meaning as recognised in the realm of international transaction, particularly in the context of the Transfer Pricing Provisions) – the inter – related and applicable substantive charging provisions as embodied in the Act should be necessarily kept in focus and taken into account.
1. The above stated proposition is found to have been conclusively settled by the case law, as emerging, -and requiring to be made a conscious note of,- from the numerous SC and HC Judgments in decided cases. As such, going by the correct legal position, unequivocally accepted, there might be no dispute – or even a remote scope for disputing any longer – that the said settled proposition is binding, with all force, on all judicial and quasi-judicial authorities, the itat being no exception. If so, all the more reason why administrative/ executive authorities are duty bound to not but follow/abide by the same as a PRECDENT.
Even at this juncture attention needs to be drawn to the Judgment of the Bombay HC (2014) in re. Vodafone India Services Pvt. Ltd vs UOI (the Vodafone case). For, that is, – apart being one of the recently reported cases in which the above referred proposition has been dealt with, and squarely covered – is of direct relevance to the itat Order selected for a detailed analysis herein. More importantly, the assessee in the mentioned itat case has cited and heavily relied upon the BOM HC Judgment in the Vodafone case.
2. The reference above is to the itat Order handed down in the case of Doshi Accounting Services Pvt. Ltd. Vs DCIT (Ahm.)(the instant case) ; which has been lately displayed also by Taxguru @ ALP provisions apply even if assessee is eligible for 100% section 10A/10B tax exemption.
2.1. In the instant case, the ‘question of law’ as framed for adjudication by the Special Bench reads:
“Whether or not the provisions of Section 92 can be invoked in a situation in which income of the assessee is eligible for tax exemption or tax holiday and thus not actually chargeable to tax in India, or in a situation in which there cannot be any motive in manipulating the prices at which international transactions have been entered into?” (para.2)
The view the itat has taken and its Answer to the posed question read:
“20. In view of the above discussion, we are of the view that even if an assessee is eligible for tax exemption at the rate of hundred percent under section 10A/10B of the Act, then also the arm’s length price on international transactions deserve to be determined under section 92C of the Act. Hence, question posed before the Special Bench is answered in negative against the assessee and in favour of the Revenue.
21. In the result, the question is answered in negative e. against the assessee.”
2.2. It is thus noted that the point of dispute has arisen out of the AO’s action in invoking sec. 92 and making an assessment by including an ‘upward adjustment’; notwithstanding that “the income” which has been so subjected to the transfer pricing provisions is, by virtue of it, as claimed, admittedly being “eligible for tax exemption or tax holiday”, “not actually chargeable to tax in India”.
3. FACTUAL MATRIX
The facts and circumstances of relevance, and the point(s) / areas of dispute, are to be found in paragraphs 3, 3.3. to 3.8.
The assessee is an Indian company. It is engaged in the business of process outsourcing (BPO) services in the field related to accounting and taxation, such as book-keeping, VAT returns, payroll, management accounting and audit. The major shareholder (99.99%- inferably, the balance of 0.01 being held by a nominee shareholder for meeting the company law requirement) of the assessee-company is Mr. Dhiren Doshi. He is the sole proprietor of the Firm, M/s Doshi & Co., based in the United Kingdom. The Assessee is providing services by exports to the UK Firm from its Unit situated at Baroda; which is a STPI Unit eligible for deduction/exemption of its ‘income’ from the said transaction of exports (the source) u/s 10A of the Act. Income from the export services to the UK Firm have been considered to be subject to the Transfer Pricing Provisions of the Act (CHAPTER X) (Per Para.3 of the Order – narrated in words as per own understanding). (Para.3)
The assessee in the year under consideration has made exports (of services) to besides the UK Firm enterprises located in Zambia, Africa. The assessee benchmarked its transactions with UK Firm by applying internal CUP method prescribed under section 92C of the Act and claimed that those were at Arm Length Price (ALP).(Para 3.3)
See paragraphs 3.4 to 3.7 to know the background facts and the reasons for which the TPO did not agree with the assessee; and, instead of the internal CUP method adopted, preferred and adopted alternatively, the so called TNM Method.
4. The assessee’s points of grievance and the grounds on which the AO’s action in his having recourse to the Transfer Pricing Provisions of the Act has been contested are set out in the succeeding paragraphs of the Order of the itat.
5. For a ready reference/ reading and understanding, those are, as considered necessary / selected, reproduced herein below (with COMMENT supplied to facilitate focus on):
“3.9 However, the TPO disregarded the contention of the assessee and ….. Accordingly, the TPO made the upward adjustment of Rs. 1,48,23,848/-.”
“4. Aggrieved by the order of TPO/AO, assessee carried the matter to Ld. DRP and vehemently objected the rejection of CUP Method, ….”
“4.1 The assessee also propositioned that it is enjoying the benefit of deduction u/s 10A of the Act. Therefore, there is no reason to charge a lower price from the UK Firm. Moreover, given the circumstances of the case, the effective tax rate in the UK would be higher than the effective tax rate in India, which as a result of section 10A of the Act is 0%. As such, there was no motive and incentive in shifting the profits from India to the UK, where the rate of tax is comparatively higher. The assessee in support of its contention also relied on ITAT Bangalore in case of Philip Software Pvt. Ltd. vs. ACIT (119 TTJ 721).”
“5. However, Ld. DRP rejected the contention of the assessee after relying on the order of Aztec software & technology services Ltd (for short ASTSL) (107 ITD 141) and ITAT Mumbai in case of Gharda chemicals Ltd vs. DCIT (2009-TIOL-790-ITAT-Mumbai).
Aggrieved by the order of Ld. DRP, the assessee is in appeal before this Tribunal. Before the Division Bench, assessee took the plea that since, it is eligible for tax exemption and not actually chargeable to tax in India, therefore there cannot be any motive to shift the profit from India to U.K. Thus no reference to TPO ought to have been made. The Bench found contradictory orders of the ITAT on the above plea and therefore, recommended the question for determination by the Special Bench. Thus this special bench has been constituted to decide the above-mentioned question.
The points which are open to be readily gathered from the foregoing paragraphs of the Order, for the limited purpose of discussion herein, are as under:
A)The assessee has objected to and contested the impugned assessment primarily on the ground that the AO has erred in invoking sec. 92 for framing/ making the assessment; notwithstanding that “the income” ,thereby subjected to the TRP, is, by virtue of it being “eligible for tax exemption or tax holiday”, “not actually chargeable to tax in India”.
B) The question of law as framed and posed to the itat, – it is required to be noted, – has been incomplete. In that, it does not, in terms, specifically cover /contest why the ‘upward adjustment’ of Rs.1,48,23,848 made by invoking the TRP and included in the assessment is not sustainable; hence is required to be annulled and deleted. In the result, the itat has proceeded to and decided the dispute with no focus on the said amount included by the AO in the computation of total income / assessment.
For another instance of the kind in which the question of law taken up was similarly incomplete, refer the reported Karnataka HC judgment (2018) in re. Philips Software case.
6. The grounds of the itat decision in the instant case have been set out in paragraphs 9. to 19. of its Order.
6.1. As indicated in Para. 9. of the Order, the itat has considered and drawn support from some of the leading SC Judgments conclusively settling one of the cardinal rule (s) of interpretation, for courts to follow. That is to the effect that, – where the language used by the legislature is clear and unambiguous then plain and natural meaning of those words should be applied to the language”; and “resort to any rule of interpretation to unfold intentions is permissible where the language is ambiguous.
In the Order of the itat extracts from some of the HC and SC Judgments thus considered and drawn support from are available for reference.
6.2. The line of reasoning followed and the view taken by the itat on the aspect of legislative intent and the need for interpretation are to be gathered from paragraphs 9.10 to 11.2.
GIST (Para. 9.10 to 9.13):
> There is no express provision under the Act restricting the application of section 92C of the Act for determining the income at arm’s length where such income is eligible for deduction u/s 10A of the Act. On the contrary, there is a Proviso to section 92C(4)of the Act which prohibits the deduction u/s 10A of the act on the income to the extent enhanced as an effect of a determination of ALP.(Para 9.10)
> The proviso itself vividly reflects the intent of lawmakers that the provisions of CHAPTER X shall prevail in all the cases of international transactions falling under the umbrella of section 92, including the income qualified for exemption under section 10A. In other words, it can be said that the intention of the statute was very much lucid that section 92 should be invoked even when the assessee is entitled to deduction u/s 10A.
> There is no need to refer to other means of interpretation if the words are clear and free from any ambiguity. However, if the words in the statute are vague and ambiguous, then external aid may be consulted for interpretation. This connotes that the statute should be read as a whole; therefore, the point which is not clear in one section may be explained in another section. (Para.9.11)
> If the purpose or object of CHAPTER X and/or section 10A is being defeated, then it is up to the legislature, if they think so, to reconstruct the law as per the required object. (Para.9.12)
However, the language used in sections 92 of the Act is clear, unambiguous, and do not lead to any absurd meaning. Thus there is no need to look into the intention or purpose of the statute or application of reasonable construction. (Para. 9.13)
> The contents of the rest (i.e. Para.9.14 to11.2)are not considered to be of much relevance ; hence not covered for the limited purpose of the discussion herein)
7. The assessee’s counsel has, apart from any other, specifically cited and strongly relied on two HC Judgments:
Karnataka High Court
The Commissioner Of Income Tax vs Philips Software Centre Pvt Ltd on 10 July, 2018
Report @ https://indiankanoon.org/doc/136853800/
Bombay High Court
Vodafone India Services Pvt. Ltd vs Union Of India, Ministry Of … on 10 October, 2014
Report @ https://indiankanoon.org/doc/131072984/
7.1. Extracts from the HC Judgment in Philips case are furnished below:
4. The summary of the findings/observations of the learned Income Tax Appellate Tribunal in its Order Date of Judgment 10-07-2018 I.T.A.No.49/2009 The Commissioner of Income Tax & Anr. Vs. Philips Software Centre Pvt. Ltd., dated 26/09/2008 as given in para 5.71 is quoted below for ready reference:-
“5.71. We, therefore, summarise our conclusion as follows:-
i) Since the basic intention behind introducing the transfer pricing provisions in the Act is to prevent shifting of profits outside India, and the assessee claiming benefit under section 10A of the Act, the transfer pricing provisions ought not to be applied to the assessee.
The point pressed by the learned counsel for the Revenue, Mr. Aravind K.V. before us today is that the learned Tribunal in the afore-quoted para.5.71(i) has made an observation that where the assessee claiming the benefit under Section 10-A of the Act, being a newly established Undertaking in Free Trade Zone is claiming deduction under that provision then, the provisions of Chapter X regarding Transfer Pricing ought not to have been applied to the Assessee. He submits that these observations are contrary to the second Proviso to Section 92C(4)of the Act. The Sub-section (4) and its First Proviso are quoted below for ready reference:-
“92C(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.”
Date of Judgment 10-07-2018 I.T.A.No.49/2009 The Commissioner of Income Tax & Anr. Vs. Philips Software Centre Pvt. Ltd.,
7. The learned counsel for the Respondent – Assessee, Mr. Farrokh Irani drew our attention to the Assessment Order passed by the Assessing Authority in the present case vide Annexure C on 31/03/2006 in which the Transfer Pricing Adjustments under Chapter X of the Act to the extent of `22,10,80,792/- were made by the Assessing Authority, but no deduction under Section 10-A is given to the Assessee with respect to the said Transfer Pricing Adjustment made by the Assessing Authority in the present case.
8. The submission made by the learned counsel for the Revenue is, therefore, misplaced and bereft of factual foundation in the assessment of the present assessee. The afore-quoted para 5.71(i) of the Tribunal cannot be even described as a finding of fact, but it is merely an obiter. Though such an obiter or observation appears to be made by the learned Tribunal in ignorance of the aforesaid Proviso to Sub-section (4) of Section 92Cof the Income Tax Act, but we do not find any binding character of such findings or observations because as far as the computation of income of the assessee is concerned, THE ASSESSING AUTHORITY HAS NOT GIVEN ANY BENEFIT OF SECTION 10-A OF THE ACT TO THE ASSESSEE WITH RESPECT TO TRANSFER PRICING ADJUSTMENTS MADE IN THE ASSESSMENT ORDER.
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9. There is no reversal of such findings of the Assessing Authority by the Tribunal in the present case. Therefore, this observation cannot be said to be causing any prejudice to the Revenue in the present case. Therefore, no substantial question of law arises on the said submission of the learned counsel for the Revenue.
10. As far as the other questions are concerned, we have already observed above that none of the questions actually gives rise to any substantial questions of law in the present appeal in view of our aforesaid judgment extracted above and therefore there is no merit in the present appeal of the Revenue.
11. The appeal of the Revenue is liable to be dismissed and is accordingly dismissed.
Now, in the instant case, the itat is not seen to have considered the implications of the above referred Kar. HC Judgment cited and relied on the assessee’s behalf.
Be that as it may, what calls for a particular noting is that, in Phillips case, same way as in the instant case, on the points of issue raised by the assessee, the ‘upward adjustment’ made and included in the assessment by invoking the TRP was, it appears, not included; so much so, that, it appears, had been left undisturbed.
Further, it is not amply clear (see the highlighted portion above in FONT) whether in framing the assessment the AO included only the amount of ‘upward- adjustment’ to the actual ‘chargeable income’ eligible for tax exemption u/s 10A , or both.
7.2. As regards the Bom. HC Judgment in Vodafone case, the itat in its Order in the instant case has dealt with the arguments of the assessee’s counsel in paragraphs 12, 12.1. and 12.2. Briefly stated, the Bom. HC case has not been followed by the itat in the instant case for two reasons namely,-
1) The facts giving rising to the question placed before the Special Bench is different; and
2) In the Vodafone case the transaction is on “capital account” “and hence there is no ‘income’ to be chargeable to tax”.
7.3. Copied below, the above referred Para. 12.2:
Similarly, we also note that there is difference between the income and total income as held by the Hon’ble Punjab & Haryana court in case of CIT, Rohtak vs. Shri Lalita ashram trust (19 taxmann.com 243). Hon’ble P&H high court held that there is a difference between ‘income’ and ‘total income’ as defined under section 11 and section 5 of the Act. Similarly, we also find that the word used under section 92(1) is ‘income’ and not ‘exempted income’. Any gain accruing from the activities defined under section 2(24) will first be construed as ‘income,’ and after that, due to the applicability of any particular provision, it may be qualified as ‘exempted income’ as in the case in hand, i.e., due to section 10A of the Act. Thus the income of assessee which accrued from the export of services will eventually become ‘exempted income’. Therefore, even when the income of the assessee is exempted under section 10A of the Act, it still fits in the definition of ‘income’ given under section 2(24) of the Act. Since the word ‘income’ is used under section 92(1) of the Act, we are of the view that the basic requirement of chapter X is fulfilled and it shall correspondingly apply in the case of the assessee.
8. OWN OBSERVATIONS, VIEWPOINTS/COMMENT:
A. The Revenue’s stance in the instant case is in essence/ to the following effect: –
Sec 10 A (being one of the items of income, which after an amendment is now grouped under CHAPTER III, instead of in CHAPTER VI as earlier) and CHAPTER X are to be construed to be not mutually exclusive; therefore, for invoking the provisions of CHAPTER X, the fact that the assessee’s income from the UK Firm qualifies for tax exemption by virtue of sec. 10A does not require to be factored in/ taken into consideration.
COMMENT Even granting but denying the validity of the above contention of the Revenue, any upward adjustment made by invoking the transfer pricing provisions (CHAPTER X) could, in own view, conceivably be made and added to enhance the income from, and only from, the relevant source, as a first step.
According to the contentions of the Revenue, – though only with a view to counter and contest the assessee’s stance in several respects, – neither of them are in disagreement but both have conceded that, – “the source of ‘income’” is the assessee’s Unit qualifying for tax holiday; so also the transaction of export sales made to the UK Firm effected through that Unit is the ‘source of income’.
COMMENT As such, according to the underlying scheme of the IT Act, income from the said source has to be first computed separately. After having done so, only thereafter the income (‘profits and gains’) so computed will have to be aggregated with income similarly computed from other sources, if any, falling under the same head of ‘profits and gains of business’.
In the instant case, the income from the export sales to the African party (ies) would require being/ may presumably have been so aggregated under the same head of ‘profits and gains of business’.
Admittedly, – not having been disputed- the assessee’s income from the above source, being eligible for tax exemption u/s 10A, is ab initio not includible in the assessee’s chargeable ‘Total Income’; hence ought to have been excluded.
In the result, therefore, what is not includible in, hence to be excluded from, the chargeable total income is the amount of income derived/ accrued from the source / transactions of export sales with the UK Firm,as computed and also, as increased by the amount of ‘upward adjustment’- that is, Rs.1,48,23,848. In other words, in the assessment the whole of the income from the said source, being excludible, should not have been charged by virtue of the overriding sec 10A.
The point made will be better appreciated through an illustration as under:
Total Income – (X+x) + Y
From the itat Order in the instant case, however, in the absence of requisite data, – same as in Philips case cited herein before, one has not been able to make out whether in the total income charged to tax, the AO has included the chargeable income from the export sales to the UK Firm as increased by the amount of ‘upward adjustment’ or only the amount of Upward adjustment (i.e. ‘x’ or ‘X+x’). Depending, however, upon what the AO has done, more but different/difficult questions are bound to arise.
More importantly, what needs to be made a conscious note of are:
In the instant case, same way in certain other cases, in a like context, the concept of ‘íncome’ has been violently tweaked; and, in essence, construed differently (see Para.12.2 of the itat Order in the instant case reproduced above). In the result, the limited point of issue as covered in the ‘question of law’ decided in the said Order happens to have, unwittingly or otherwise, the disastrous effect of changing and writing down even the most fundamental concepts of ‘source’, ‘income’, ’chargeable income’ and ‘total income’, contrary to the legislative intent at the time when the IT Act of 1922, thereafter the 1961 Act, was brought on the statute book – the law on income-tax.
B. The subject matter of controversy relates, and dates back, to the special regulatory provisions brought on the statute (IT Act) in early 2002, almost two decades ago. The objective as avowed has been to control / curb ‘avoidance of tax’. Sections 92 to 92F (as those then were, – but since changed and amended in several material respects) are grouped in Chapter X of the Act and cover transfer pricing of both goods and services. It is now history that even within the short span of five years of CHAPTER X coming into force; the referred provisions have had given rise to disputes of sorts between the revenue and the taxpayers in quite a few cases. Instances of such disputes are to be found in the two Orders of the itat cited below:-
The Aztec case, it is seen, has been cited also before the itat in the instant case.
3. In Aztec case, the assessee’s contention was that, according to the provisions of sections 92C and 92CA, the AO could not proceed to determine ALP without first satisfying himself that the transfer price adopted by the assessee was prima facie fixed with the objective of avoidance of tax.
The Tribunal had recorded but only to reject the assessee’s with the following observations:
“A perusal of the provisions of sections 92C and 92CA reveals that these provisions can be invoked by the Assessing Officer and he can proceed to determine ALP where he either finds the existence of the circumstances mentioned in clauses (a) to (d) of section 92C(3) or where he considers it necessary and expedient to refer the determination of ALP to the TPO. There is no other requirement for invoking these provisions by the Assessing Officer. Besides, as per the mandate of section 92(1), income from international transaction between associated enterprises has to be computed having regard to ALP. Therefore, the question of tax avoidance is not to be established by following mandatory provisions. Therefore, the language used by the Legislature is plain and unambiguous and there is nothing in the language employed by the Legislature on the basis of which it can be said that the Assessing Officer must demonstrate the avoidance of tax before invoking these provisions. As per the settled legal position, one is not required to find the intent of the Legislature by referring to the Budget Speech of the Finance Minister, notes on clauses, circulars, etc., when language of the statute is clear and unambiguous.”
As is to be seen from the above quoted paragraph, the Tribunal has rejected the assessee’s basic contention by referring to a few known general rules of interpretation. Nonetheless, as one must be aware, there are a number of other rules/principles enunciated by Courts, as Aids to choose and follow- impinging on or against the point of issue on hand. In fact, those may be found to throw more light in the matter.
Some of those of direct relevance in the context herein are briefly the following:
a) The legislative intent must be ascertained, not only from the phraseology of the provision but also by considering the nature, its design and the consequences which would follow from construing it in one way or the other.
b) The rule of construction of the charging section, and the computation provisions, which help to determine the ambit of the charging section, together constituting an integrated code, should be strictly construed.
c) The question as to whether a statutory provision is mandatory or directory depends upon the intent of the Legislature. The use of the word ‘shall’, though generally taken in a mandatory sense, does not necessarily mean that in every case it must have that effect.
> For MORE suggest looking through the Experts’ commentary and the cited case law for support, in any leading Text Book on the law on income- tax.
With the foregoing kept in the Backdrop/ for a sharp focus:
All the relevant sections grouped in CHAPTER X, in general, and sections 92 to 92F, in particular, cannot rightly be regarded to make it explicit that those would apply to every single international transaction regardless of whether the assessee in a given case can be rightly faulted to have resorted to any abuse of transfer pricing provisions with the motive of avoidance of tax as envisaged.
Now, turning to the Order of the itat , the (‘three member’) Special Bench in the instant case, it is observed that, the reasoning followed and the logic adopted are , – no guess that is by accident or otherwise- materially no different from those but tally with, the itat Order in Aztec case. For that matter, if critically looked through, it is observed that, most of the observations of the itat in the instant case are reminiscent of those of the itat in Aztec case.
Be that as it may, the since admitted legal position (as borne out by the itat Order in the instant case itself)is that the itat Order (2007), -which has to be necessarily read together with the order of the Special Bench (Five Members) of itat , Bangalore, – stands overruled by the HC Judgment in Vodafone case. Premised so, the said HC Judgment, as urged / relied upon by the asseesee in the instant case, might have to be followed.
The itat in the instant case has, for its own stated reasons, however, not done so; instead, has expressed its ‘reluctance’ to do so (see para.12.1 quoted herein before). That is a different aspect which, for obvious reasons, is required to be dealt with separately.
However, in one’s firm conviction, the view taken that “the question pleaded before this bench and in case of Vodafone (supra)are different” , – for the reason that the transaction in Vodafone case was on ‘capital account’ (not on ‘revenue account’, – to say the least, does not seem to make for any sound sense or logic. Especially because such a view does not apparently reflect the correct position in law , should due regard be had to the fact that the word ‘income’ – a basic concept – has to be construed no differently but uniformly for all purposes of the IT Act, as specially defined in sec 2 (24). The point in mind is that the said definition, indisputably, takes within its fold, and the meaning given applies, to every kind of ‘income’ irrespective of it being on ‘revenue account’ or ‘capital account’. In other words, the view the itat has taken in the instant case is in direct conflict with/contradicts the above referred construction expected to be placed, with no reservation whatsoever, on the word ‘income’ as used in several contexts of CHAPTER X in general, and in sec 92 C and / or sub-section (4) or the Proviso thereto, in particular.
C. Going by wisdom gathered in hindsight, one has been left wondering whether, – having regard to the admittedly muddled state of affairs as largely prevailing, so also inconsistent judicial views on all related issues- in the instant case, it would have been prudent for the itat to have considered and decided to, – instead of constituting a special three-member bench,- have all such similar cases wherever pending, consolidated, and straight away referred to the apex court for a final and conclusively binding Judgment. More so, in the light of the fact that the Order of the itat (a five-member bench) itself has already been, and stands, overruled by the HC Judgment in Vodafone case.
Disclaimer: The foregoing thoughts and viewpoints are intended to serve the purpose of a personal FEED-input, albeit for the COMMON GOOD of one and all, unlike me, having concerns/ vested interests. The principal aim is to inspire the EXPERTS in field practice to devote more thoughts on the indicated lines and have their independent but well-considered views shared with the rest (professionals and clientele alike) for the altruistic purpose in one’s mind.
TAIL Note: The TEXT of this write-up has been released for display in a compulsive hurry, but in the same spirit. Errors and omissions, found if any material, are regretted!