Constitutional Validity of transfer pricing provisions

Where the AO issued reopening notices to the assessee, a foreign company, on the ground that income had escaped assessment because as per the transfer pricing provisions the profit charged by the assessee on services rendered to its associated enterprises was abnormally low and the same was challenged by the assessee on various issues, HELD, dismissing the Petition that:

(1) There is no lack of Legislative competence in enacting the transfer pricing provisions and making them applicable to foreign companies. The provisions seek to remedy the mischief of multinational companies of allocating profits in intra group transactions to outside jurisdiction resulting in tax evasion;

(2) The transfer pricing provisions are applicable to a 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. There is no ambiguity or absurd consequence of application of Chapter X to persons who are subject to jurisdiction of taxing authorities in India;

(3) There is no requirement to establish transfer of profits outside India or evasion of tax before applying the transfer pricing provisions;

(4) The fact that under the FERA – RBI approval the assessee cannot charge more than particular price cannot control the arms’ length price;

(5) There is no requirement to give a hearing at the stage of making reference under Section 92 CA of the Act because the decision to make a reference does not visit the assessee with any civil consequence;

(6) The fact that in the recorded reasons, the AO referred to the inapplicable provisions of s. 92 as it stood prior to amendment w.e.f. 1.4.2002 and the order of the TPO passed in respect of a subsequent assessment year is not a bar for reassessment.

For other transfer pricing judgments see: Moser Baer India Ltd vs. ACIT (Delhi High Court), Philips Software vs. ACIT (ITAT Bangalore) and Sony India vs. DCIT (ITAT Delhi)

Fees for technical/professional fees of a NR is not taxable in India if it is not rendered in India and utilized in India.

Where the assessee was a UK based firm of solicitors without an office or fixed base in India and it was appointed as English law legal advisers for projects in India and the question arose whether it was assessable to tax in respect of the entire fees or only that portion which was attributable to its operations in India, HELD, accepting the assessee’s claim:

(1) Under Article 15 of the India-UK DTAA, fees from professional services may be taxed in India only if the services are performed in India and the assessee is present in India for more than 90 days in the relevant fiscal year;

(2) If the presence in India is for more than 90 days, the taxability of the income will have to be determined u/s 9(1) (i);

(3) The fiction of s. 9 is subject to the territorial nexus doctrine and income that arises out of a transaction requires to be apportioned to each of the territories. Whatever is payable by a resident to a non-resident by way of fees for services would not always come within the purview of section 9(1)(vii) of the Act. It must have sufficient territorial nexus with India so as to furnish a basis for imposition of tax.

(4) In accordance with the judgement of the SC in Ishikawama Harima 288 ITR 408 a non-resident is taxable on income for services only if the services are rendered within India and are part of a business or profession carried on by such person in India. Both the above conditions have to be satisfied simultaneously.

Accordingly, only the income charged on hourly basis in India and utilized in India is chargeable to tax.

Also See CIT vs. Siemens AG (Bombay High Court) and Royalties and Fees for Technical Services in International Trade

Hearing procedure to be followed by the Transfer Pricing Officer

Where the assessees challenged by writ petitions the orders passed by the Transfer Pricing Officer (“TPO”) determining the Arm’s Length Price (“ALP”) in relation to “International transactions” on the grounds that the said orders were passed without granting an oral hearing and without considering the documents and information filed by the assessees and without disclosing the information and documents obtained by the TPO which were used by him in the determination of the ALP, HELD, allowing the challenge:

(1) S. 92CA (3) imposes an obligation on the TPO to accord an oral hearing to the assessee. Even otherwise, an order entailing civil and penal consequences cannot be passed without a hearing.

(2) The fact that the assessee did not demand an oral hearing makes no difference. It is the constitutional obligation of the State to adopt a procedure which is both fair and just while dealing with its citizens. The fact that a citizen is unaware of his legal right cannot be used as a plank to seek legal sustenance for its actions which are otherwise invalid. It is duty of the State, in its role as a litigating party, to inform the citizen of his right i.e., to seek an oral hearing.

(3) The argument of the department that the failure to grant an oral hearing is a defect which could be cured by providing such an opportunity in the appellate forum is not acceptable.

(4) As a matter of procedure, the show-cause notice issued by the TPO just prior to the determination of ALP should refer to the documents or material available with the AO in relation to the international transaction in issue. The show cause notice should also give an option to the assessee:-

(a) To inspect the material available with the AO as give the leeway to file further material or evidence if he so desires, and

(b) to seek a personal hearing in the matter.

(5) An order is passed in breach of the principles of natural justice is a nullity in the eye of law and consequently a writ petition is maintainable notwithstanding the availability of alternate remedy.

For other transfer pricing judgments see: Philips Software vs. ACIT (ITAT Bangalore) and Sony India vs. DCIT (ITAT Delhi)

Q whether the Court has power to condone delay in filing statutory appeals etc referred to a Full Bench.

In CCE vs. Punjab Fibres Ltd (223) E.L.T. 337 the Supreme Court held that the High Court has no power to condone delay in filing of a Reference Application u/s 35H(1) of the Excise Act on the ground that where the statute specifies a limitation period, s. 5 of the Limitation Act would not apply. There are doubts about the correctness of this judgment because the power of the High Court to condone delay cannot be circumscribed by the statute. Accordingly, the issue should be referred to a Full Bench.

See Also: CCE vs. Shruti Colorants (Bombay High Court)

Depreciation, whether mandatory for Ch. VI-A, referred to Full Bench.

On the question as to whether for the purpose of availing deduction under Ch VI-A of the Act, the gross total income is required to be computed by deducting allowable depreciation even though the assessee had disclaimed the same for the purpose of regular assessment, there is a conflict of views between two Division Benches of the Court in Grasim Industries Ltd 245 ITR 677 and Scoop Industries 289 ITR 195. Accordingly, the issue has to be referred to the Full Bench.

But see: Dabur India Ltd vs. CIT (Delhi High Court) where Vahid Paper Mills 98 ITD 165 (SB) (Ahd) was upheld.

(1) A person who is not suitable to be appointed as a permanent Judge on the ground of unsuitability due to adverse factors on account of mental and physical capacity, adverse materials relating to character and integrity and other relevant matters, which are so paramount and sacrosanct for the functioning as a Judge, should not be continued as an Additional Judge. He should also not be given an extension.

(2) On facts, though all the members of the collegium including the then Chief Justice of India opposed the appointment of respondent No.2 (Justice Ashok Kumar) as a permanent Judge his term as additional judge was extended from time to time apparently at the behest of the Government. “the then Chief Justice should have stuck to the view expressed by the collegium and should not have been swayed by the views of the government to recommend extension of the term .. as it amounts to surrender of primacy by jugglery of words”. However, the belated challenge to the extensions “cannot put the clock back”.

(3) The concerned judge has been transferred to some other High Court in public interest (A. P. High Court) and if it comes to the notice of the Hon’ble Chief Justice of India that action needs to be taken in respect of him for any aberration while functioning as a Judge, appropriate action as deemed proper shall be taken.

U/s 2 (22) (e), deemed dividend can be assessed only in the hands of a person who is a “shareholder” of the lender company;

The expression “shareholder” in s. 2 (22) (e) refers to both a registered shareholder and beneficial shareholder. If a person is a registered shareholder but not the beneficial shareholder than the provisions of s. 2(22) (e) will not apply. Similarly if a person is a beneficial shareholder but not a registered shareholder then also the provisions of Sec. 2(22) (e) will not apply.

Priority of State Dues over third-party claims

While the arrears of the State have priority over private debts owed to ordinary or unsecured creditors, this priority does not extend over secured creditors (subject to statutory exception). The fact that the tax arrears are recoverable as arrears of land revenue makes no difference to this principle of common law.

See Also: Krishna Lifestyle vs. UOI (Bombay High Court)

penalty proceedings without recording satisfaction

(1) The judgement of the Division Bench in CIT v. Ram Commercial Enterprises Ltd. (2000) 246 ITR 568 (Delhi) holding that penalty under Section 271(1)(c) of the Act cannot be levied where the authority initiating the penalty proceedings had not recorded its satisfaction regarding concealment of income or furnishing of inaccurate particulars thereof by the assessee is approved.

(2) This position applies till the insertion of sub-section 1B to s. 271 by the Finance Act, 2008 w.r.e.f 1.4.1989 which creates a fiction by which satisfaction of the assessing officer is deemed to have been recorded in cases where an addition or disallowance is made by the assessing officer and a direction for initiation of penalty proceedings is issued.

Where the assessee, a Dutch company, purchased shares of a Cayman Company (which in turn held shares of an Indian company ‘Hutch Essar’) from another foreign company (HTIL) and the AO issued a notice asking the assessee why it should not be treated as an assessee in default for failure to deduct tax at source and the assessee filed a writ petition to challenge the same on the ground that a transaction between two foreign companies did not attract the provisions of the Act, HELD dismissing the writ petition that:

(a) Prima facie, the subject matter of the present transaction between the assessee and HTIL is nothing but transfer of interests, tangible and intangible in Indian companies and not an innocuous acquisition of shares of a shell Cayman Islands Company;

(b) As there was admittedly a transfer of controlling interest in the Indian company by the transferor in favour of the transferee, there was an “extinguishment of rights” and “relinquishment” by the transferor in the shares of the Indian company which constituted a “transfer”;

(c) Apart from controlling interest the assessee had acquired other interests and intangibles rights in India such as an interest in a joint venture between HTIL and the Essar group and became a co-licensee with the Essar group to operate mobile telephony in India;

(d) In this case, the shares in the Cayman company were merely the mode or the vehicle to transfer the assets situated in India. The choice of the assessee in selecting a particular mode of transfer of such assets will not alter or determine the nature or character of the asset;

(e) As the assessee had wilfully failed to produce the primary/original agreement and other prior and subsequent agreements/documents it was impossible to appreciate the true nature of the transaction and the constitutional validity of Income-tax provisions could not be gone into;

(f) It is settled law that a writ cannot be entertained against a mere show-cause notice unless the Court is satisfied that the show cause notice was totally non est in the eye of law for absolute want of jurisdiction of the authority to even investigate into facts. The assessee has not been able to demonstrate absolute want of jurisdiction in the AO.