Calcutta High Court
Price Water House & Anr vs Commissioner Of Income Tax-Xix & Ors on 8 December, 2016
Author: Arijit Banerjee
Bench: Arijit Banerjee
In the High Court At Calcutta
Constitutional Writ Jurisdiction
Original Side
WP 733 of 2014
Price Water House & Anr.
-Vs.-
Commissioner of Income Tax-XIX & Ors.
With
WP 735 of 2014
Lovelock & Lewes & Anr.
-Vs.-
Commissioner of Income Tax, Kolkata-XIX & Ors.
Before : The Hon'ble Justice Arijit Banerjee
For the petitioners : Mr. S. Pal, Sr. Adv.
Mr. D. Kundu, Sr. Adv.
Mr. I Nandi, Adv.
Mr. D.P. Samanta, Adv.
Mr. P. Das, Adv.
For the Respondents : Mr. R.N. Bandopadhyay, Adv.
Mr. P. Dudhoria, Adv.
Heard On : 01.04.2015, 13.05.2015, 15.07.2015, 19.08.2015
26.08.2015, 31.08.2015, 08.09.2015, 22.09.2015
09.10.2015, 26.11.2015, 15.12.2015, 21.12.2015
11.02.2016, 19.05.2016, 30.06.2016
CAV On : 19.07.2016
Judgment On : 08.12.2016
Arijit Banerjee, J.:
(1) These two writ petitions arise out of similar facts and involve the same question of law. Accordingly, the two writ petitions were taken together for hearing and are being disposed of by this common judgment and order.
(2) The subject matter of challenge in the two writ petitions is a reference made by the respondent no. 3 (Assistant Commissioner of Income Tax) to the Transfer Pricing Officer (in short 'TPO') under Sec. 92CA(1) of the Income Tax Act, 1961 (in short the 'IT Act') communicated by the respondent no. 3 vide his letter dated 4 April, 2014, a notice dated 4 April, 2014 issued by the respondent no. 3 under Sec. 142(1) of the Income Tax Act and a notice dated 6 June, 2014 issued under Sec. 92CA(1) read with Sec. 92D of the Income Tax Act issued by the TPO relating to the assessment year 2011-12 and the proceedings in pursuance of such notice. The reference to factual details in this judgment shall pertain to WP No. 733 of 2014 (Price Waterhouse & Anr.-vs.-Commissioner of Income Tax, Kolkata).
Case of the petitioners:
(3) The short point urged by Mr. Pal, Learned Sr. Counsel for the petitioners is that the reference to the TPO is without jurisdiction. As such all actions taken or contemplated pursuant to such reference are or would be bad in law. He submitted that the reference is ultra vires the Income Tax Act since the conditions precedent for a transaction to be 'international transaction' within the meaning of Sec. 92B of the Income Tax Act are not fulfilled even assuming the correctness of the allegations based on which the impugned reference has been made. (4) Mr. Pal referred to Sec. 92 (Computation of income from international transaction having regard to arm's length price), Sec. 92A (meaning of associated enterprise), Sec. 92B (meaning of international transaction), Sec. 92CA (reference to Transfer Pricing Officer) and Sec. 92F(iii) (definition of enterprise) of the Income Tax Act. The main argument of Mr. Pal hinges on Sec. 92A and Sec. 92CA(1) of the IT Act and the same are set out hereunder:-
S. 92A:-Meaning of associated enterprise_(1) For the purposes of this section and sections 92, 92B, 92C, 92D, 92E and 92F, 'associated enterprises', 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 enterprises; 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.
S. 92CA:- Reference to Transfer Pricing Officer-(1) Where any person, being the assessee, has entered into an international transaction or specified domestic 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 Principal Commissioner or Commissioner, refer the computation of the arm's length price in relation to the said international transaction or specified domestic transaction under section 92C to the Transfer Pricing Officer."
(5) Mr. Pal then referred to Sec. 2(1)(b) of the Institution of Chartered Accountants of India Act, 1949 (in short 'ICAI Act') which defines a Chartered Accountant as a person who is a member of the institution of Chartered Accountants of India. Mr. Pal also referred to Secs. 4, 7 and 25 of the ICAI Act which I have carefully considered.
(6) Mr. Pal submitted that a reference under 92CA of the IT Act can be made to the TPO only if there is an international transaction. The expression 'international transaction' has been defined under Sec. 92B(1) of the IT Act to mean a transaction between two associated enterprises. The expression 'associated enterprise' has been defined in Sec. 92A of the IT Act. On a conjoint reading of Secs. 92A(1) and 92A(2) of the IT Act it would appear that two enterprises can be treated as 'associated enterprises' only if one or more of the conditions specified in clauses (a) to
(m) of Sec. 92A (2) of the IT Act are satisfied. Mr. Pal pointed out that Sec. 92A(2) of the IT Act was amended by the Finance Act, 2002, with effect from 1 April, 2002. Purposive interpretation aims at arriving at the true meaning of a statutory provision. In this case the amendment to Sec. 92A(2) itself makes the purpose of amendment clear. Sec. 92A(1) is not independent of Sec. 92A(2) and the two sub-Sections are to be read together. In support of this submission Mr. Pal referred to the Memorandum to the Finance Bill, 2002, the relevant extracts whereof are as follows:-
"It is proposed to amend sub-Section (2) of the said Section to clarify that the mere fact of participation by one enterprise in the management or control or capital of the other enterprise, or the participation of one or more persons in the management or control or capital of both the enterprises shall not make them associated enterprises, unless the criteria specified in sub-Section (2) are fulfilled."
(7) Mr. Pal then submitted that for the purpose of finding out the true meaning of a statutory provision, it is permissible to refer to external aids like Parliamentary materials including Bills and memorandum accompanying the Bills. In this connection he referred to a decision of the Hon'ble Apex Court in the case of Allied Motors (P) Ltd.-vs.-Commissioner of Income Tax, Delhi, (1997) 3 SCC 472, in support of his submission that the memorandum to the Finance Bill can be used as an aid to interpret a particular section of the Finance Bill. In this connection he also relied on a decision of the Hon'ble Supreme Court in the case of Pepper-vs.-Hart, (1993) AC 593, in support of the proposition that reference to Parliamentary material should be permitted as an aid to the construction of a legislation in order to give effect to the true intention of the legislation. He then referred to the Hon'ble Apex Court's decision in the case of K. P. Varghese-vs.-Income Tax Officer, Ernakulam, (1981) 4 SCC 173, and submitted that in that case the Hon'ble Apex Court interpreted a section having regard to the object and purpose for which it had been enacted. (8) Learned Sr. Counsel then submitted that Sec. 92B(2) of the IT Act only extends the scope of 'international transaction' defined in Sec. 92B(1) by providing that a transaction entered into with an unrelated person shall be deemed to be an international transaction with an associated enterprise only if there exists a prior agreement in relation to the 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. He submitted that Sec. 92B(2) is not meant to cover a situation of a transaction between two non-associated enterprises as the said section envisages a tripartite situation. (9) On the factual aspect, Mr. Pal submitted that the writ petitioner no. 1 (in short 'PWH') is a partnership firm of Chartered Accountants which provides professional services within the Regulations and Framework of the ICAI Act. It is managed and controlled by its partners who are individuals and residents of India. No legal entity or corporation, whether overseas or domestic can be or is a partner of PWH as per Sec. 25 read with Sections 4, 7 and 2(1)(b) of the ICAI Act. The entire capital of PWH has been contributed by its partners and not by any other person or entity. (10) Mr. Pal submitted that PWH being an independent audit firm, is desirous of achieving greater professional efficiency and providing better service to clients particularly in the post liberalized economic era with large number of foreign companies entering into the Indian business and industry and Indian business investing and operating overseas. To achieve the said objective PWH has become a member firm of 'PwC Network'. PWH has entered into an agreement with PricewaterhouseCoopers International Limited (in short 'PwCIL') a company incorporated in the United Kingdom, to become a member of PwCIL. The member firms of PwCIL are collectively known as the PwC Network. Each member firm of PwCIL is a separate legal entity and separate from PwCIL.
PWH is an independent member of the PwC Network of firms. Member firms of the PwC Network are not legal partners with each other. As members of the PwC Network member firms agree to comply with common standards and policies including those with respect to quality of services. Hence, while PWH is a member firm of the PwC Network, at the same time, it is a separate and independent legal entity whose affairs are managed and controlled only by its partners.
(11) Learned Sr. Counsel then submitted that the PwC Network has member firms in over 150 countries including India. Each member firm has recognized that the business of its clients is increasingly being conducted on a worldwide basis with the result that such member firms need to cooperate with each other in the PwC Network so that professional services of high quality can be provided to mutual clients or other clients on a coordinated basis and each member firm has also recognized that in order to provide such coordinated client service it must maintain a high level of human, technological and capital resources consistent with the level required to be and maintained by other member firms and by the competitors. PwCIL acting for the benefit of PwC Network, sets standards, principles, strategies and policies applicable to all member firms and monitors and reviews their implementation by member firms. (12) PrisewaterhouseCoopers Services BV, Netherlands (in short 'Services BV') is a company set up in 1998. It is the central services entity of the PwC Network and operates exclusively for the mutual benefit of all PwC Network member firms. It is based in the Netherlands and operates on a no profit basis. In furtherance and support of the coordinating activities and purpose of PwCIL, PwC member firms pay the costs of coordinating activities together with the costs of developing and strengthening the PwC Network incurred by Services BV. Services BV works in a manner where no member firm has any exclusive right over the underlying assets funded in whole or in part by Services BV since such assets are developed for the benefit of all member firms and all having right of access to such assets by virtue of sharing the costs of their development. No profit arrangement by Services BV works in a manner where all member firms contribute to the costs and in turn have access to the assets procured or developed. The arrangement administers the access to and sharing of a range of services also. Services BV collects such cost contributions from member firms and uses those funds to defray the costs of the PwC Network activities. Services BV remits the funds directly to the member firms which have incurred costs to support PwC Network activities. In case of need, Services BV also may provide funds to one or more of the member firms in the form of grant or subvention which is non-refundable in nature to support and strengthen the member firms in the local market places to become more effective in providing professional services of a high quality to clients. Such grant does not assume the nature of equity or loan. Services BV is a service company and does not exercise any management function or control over the PwC member firms not does it provide professional services to clients nor conducts or supervises any professional engagements. It exits for the mutual benefit of the member firms in the PwC Network. Neither the member firms of the PwC Network nor PwCIL nor Services BV nor any other overseas entity holds any interest or control in PWH. PWH is not a subsidiary, shareholder or agent of any of the overseas entities and has no profit sharing with any overseas entity.
(13) Neither PWH nor any of its partners is a shareholder of Services BV. Services BV has not conferred on PWH any right regarding use of any brand name as Services BV itself does not own any brand name. PWH is also not permitted to use the brand name of PricewaterhosueCoopers as per the Chartered Accountants Regulations, 1988. PWH has not taken any loan or guarantee from Services BV. During the year under consideration a non- refundable loan of INR 65,06,55,000/- was received by the PwC Network, to strengthen PWH's audit practices in India. Such loan was provided to meet the costs needed to improve the audit quality and training in the manner which allowed for sustainable operations and enhanced sustainable audit quality. The grant was received under the contractual arrangement existing between Services BV and PWH and has been accounted for as sundry income on an accrual basis and has been offered for taxation in computing the total income for the year under consideration as business income. PWH filed its income tax returns for the assessment year 2011-12 and also filed a revised return. The return filed by PWH was selected for scrutiny assessment by the assessing officer and notices under Secs. 143(2) and 142(1) of the IT Act were issued by the assessing officer requiring PWH to file its computation on income and tax for the year, audit profit and loss account and balance-sheet, tax and audit report issued under Sec. 44AB of the IT Act. PWH filed all necessary documents.
(14) In the aforesaid factual background, the respondent no. 3 issued a letter dated 4 April, 2014 informing PWH that a reference has been made to the TPO and called upon PWH to file the details requested for in the earlier notices. Along with the said letter, the respondent no. 3 also issued a notice under Sec. 142(1) of the IT Act requiring PWH to produce the details as called for. By a letter dated 15 May, 2014 PWH contended that Transfer Pricing Regulations do not apply to PWH as it does not have a relationship of being an associated enterprise with any overseas network entity as defined under Sec. 92A of the IT Act. On 9 June, 2014, PWH received a notice dated 4 June, 2014 issued under Sec. 92CA(2) of the IT Act read with Sec. 92D thereof issued by the TPO, asking PWH to furnish a number of details, documents, explanations etc in connection with the transfer pricing proceeding. In response, PWH wrote a letter dated 26 June, 2014 to the TPO stating that it had no international transaction in the assessment year in question nor in any of the earlier assessment years. PWH contended that it had never entered into any international transaction envisaged under Sec. 92 B of the IT Act, and, hence, it was unable to comprehend the reasons for which reference had been made under Sec. 92CA(1) of the IT Act to the TPO. Mr. Pal submitted that the interactions of PWH with Services BV do not attract the conditions specified in clauses
(a) to (m) of Sec. 92A(2) of the IT Act. As such, Services BV cannot be treated as an associated enterprises of PWH. Hence, PWH cannot be treated as being involved in any international transaction. Consequently, the very basis for invoking Sec. 92CA(1) of the IT Act is absent and the reference to the TPO is without jurisdiction.
(15) In the alternative, Learned Counsel submitted that even if the provisions of Sec. 92A(1) of the IT Act are applied independently of Sec. 92A(2), Services BV cannot be treated as an associated enterprises of PWH since Services BV does not participate in the management or control or capital of PWH. Such participation in the management, control or capital is exercised solely and exclusively by the partners of PWH. (16) Mr. Pal then submitted that the reference to the TPO has been made without application of mind as the respondent no. 3 completely ignored that in the past, in the identical factual pattern, the assessing officer accepted that the transactions between PWH and Services BV are not international transactions falling within the purview of Sec. 92B of the IT Act and consequently under Chapter X of the Act. The fact that the transactions between PWH and Services BV are not international transactions as per Sec. 92B of the Act was accepted in the immediate preceding year i.e. assessment year 2010-11 after making enquiries in respect of the same. Even during the pendency of the present writ petition, the view that the transactions between PWH and Services BV are not international transactions within the meaning of Sec. 92B of the Act was accepted during the revisionary proceedings for the assessment year 2009-10. Hence, there is no justification for the respondent no. 3 to take a different view on the same set of facts and law. In this Connection Mr. Pal relied on Hon'ble Apex Court's decision in the case of M/s. Radhasoami Satsang, Soami Bagh, Agra-vs.-Commissioner of Income Tax, (1992) 1 SCC 659, paragraph 16 whereof is as follows:-
"16. We are aware of the fact that strictly speaking res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year."
(17) On the basis of the aforesaid submissions Mr. Pal invited this Court to allow the writ applications.
Contention of the respondents:-
(18) Appearing on behalf of the department Mr. R. N. Bandyopadhyay, learned Counsel submitted that PWH and Services BV are associated enterprises within the meaning of Sec. 92A of the IT Act. PWH and Services BV have common features of transaction.
(19) Learned Counsel referred to an agreement between PWH and Services BV dated June, 1998 wherein the latter was to provide a host of services to PWH and PWH was making quarterly payment to Services BV and debiting such amount in its profit and loss account as Global Service Charges. The amounts so debited were Rs. 3,34,56,530/- for the assessment year 2009-
10; Rs. 2,23,53,329/- for the assessment year 2010-11; Rs. 2,16,67,274 for the assessment year 2011-12; and Rs. 2,17,00,830/- for the assessment year 2012-13. The only documents produced in respect of such payments are the service agreements and the bills raised by services BV and no other documents or information about Services BV have been provided at any scrutiny assessment proceedings. No description of services rendered by Services BV has been mentioned in the bills raised by it. Though a host of services is claimed to have been rendered by services BV, PWH has never produced any details of such services.
(20) During the scrutiny assessment for the assessment year 2010-11, PWH produced the service agreement dated June, 1998. In the assessment year 2011-12, PWH produced another service agreement dated 1 July, 2009. It is strange that this new agreement was not produced at the time of scrutiny assessment for the assessment year 2010-11. PWH was also unable to explain the difference between the two service agreements. It was also not explained as to how and why payments were made in accordance with the service agreement made in 1998 for the assessment year 2010-11 when the new agreement dated 1 July, 2009 had been entered into and was presumably in force. This shows that both the agreements were in operation and were similar in all respect. In substance, it is Services BV which has financial and managerial control over PWH. A plain reading of the service agreements reveals that PWH has to utilize the services rendered by and practices envisaged by Services BV in all spheres of professional activity and Services BV shall constantly keep a watch over the activities and performance of PWH.
(21) In the service agreements it is mentioned that Services BV does not provide any professional services to its clients. However, in its income returns, PWH has claimed the amount paid to Services BV as service charges. The details or nature of services rendered by Services BV to PWH have never been disclosed. No documentary/material evidence was ever produced to substantiate the claim of PWH. The documents which were produced were some sort of computer print outs akin to windows update messages which have very little authenticity.
(22) During the assessment year 2011-12, PWH received a sum of Rs. 68,51,08,927/- as non-refundable amount from Services BV. PWH offered the same for taxation as 'income support' under the head of business income. It claimed that this amount was received under an agreement dated 16 March, 2011. PWH failed to explain the necessity of such an agreement when as per its statements, under the service agreement dated 1 July, 2009, Services BV could have provided the non-refundable grant to PWH for the same purpose as envisaged in the grant agreement. (23) In the assessment year 2010-11, PWH received a sum of Rs. 20,76,83,056/- as non-refundable grant from Services BV. During the assessment proceedings for the said assessment year, PWH did not file any details about the receipt of such non-refundable grant. Similar non- refundable grant of Rs. 86,68,40,869/- was received by PWH in the assessment year 2012-13. PWH has contended that these grants were received for strengthening the audit practices in India. However, PWH has failed to disclose how such non-refundable grant was spent. (24) In April, 2011, the USA Security Exchange Authorities imposed a fine of US $7.5 million on the PWC Indian Firms on account of fraud committed in connection with the Satyam Scam. Though the date of the order was 5 April, 2011 PWH has debited its account for a penalty of Rs 6,74,17,026/- in the financial year 2010-11. However, PWH never disclosed the costs of litigation in the USA in the Satyam fraud case including who had borne the expenses of litigation and whose accounts have been debited with the costs.
(25) In the assessment year 2010-11, the Assessing Officer disallowed a total expense of Rs. 2,23,53,329/- in the case of PWH holding that it had failed to substantiate that those expenses were neither in the nature of capital expenditure nor personal expenses of PWH and were incurred for the purpose of its business. Assessment for the assessment year 2008-09 has been reopened under Sec. 147 of the IT Act and the transfer pricing issue will also be examined. During the assessment year 2010-11 wherein the aforesaid expenditure was disallowed the issue of transfer pricing shall also be examined.
(26) Another firm viz M/s. Price Waterhouse & Co. has also received around Rs. 31 crores in the assessment year 2009-10 and Rs. 10 crores in the assessment year 2010-11 as non-refundable amount from Services BV. However, the said firm has not offered these amounts for taxation. The assessment in this behalf for the years 2009-10 and 2010-11 has been reopened under Sec. 147 of the IT Act.
(27) No expenditure has been incurred by PWH for receiving the said non- refundable amounts from Services BV. Since PWH has not provided any professional services to Services BV, such non-refundable grants were held to be income from other sources in the assessment years 2009-10 and 2010-
11. No document justifying or explaining such non-refundable grant was produced for the assessment years 2009-10 and 2010-11.
For the first time, in the assessment year 2011-12 an agreement dated 16 March, 2011 was produced, said to have been entered into by and between PWH and Services BV. This is a suspected document. The proper name of the authorised signatories on behalf of the parties to the agreement was not mentioned in the agreement. The agreement mentioned that it would be in full force and would be binding as of 01.03.2010. The assessment for the assessment year 2010-11 in the case of Lovelock & Lewes was completed in March, 2013. However, the assessee did not produce this document at the time of scrutiny assessment. Suddenly, in the assessment year 2011-12 the assessee stated that there is an agreement for receipt of non-refundable grant. Since, the agreement stated that it would be effective from 1 March, 2010, the grant received by PWH in the assessment year 2009-10 would also be covered. Thus, in the assessment year 2009-10 and 2010-11, in the case of PWH not a single document justifying receipt of non-refundable grant or its utilization was produced by the assessee. The assessee could not offer any satisfactory explanation about the utilization of the grant for the purpose enumerated in the said agreement. Its contention is that the amount has merged in the common pool of funds and separate details of expenses out of such grant is not maintained by it. It is also not known as to whether Services BV was taking stock of proper utilization of the funds by the assessee. If non- refundable funds are given for specific purposes year after year, without knowing whether such funds are utilized in proper manner, it clearly shows that Services BV is in full control of the assessee.
PWH is also changing its stand. Earlier it was stated that the grant was received as per the agreement made in 1998 as the assessee was entitled to the receipt of its share from Services BV of the income earned from other members shares. Now it is contended that there was a separate agreement dated 16 March, 2011 and that was for specific purposes. It is clear from the nature of the transactions between PWH and Services BV, the latter is in full managerial control over the former as envisaged under Sec 92A(1)(a) of the IT Act.
(28) Learned Counsel then submitted that another aspect of the case is that the assessee claiming expenses incurred on insurance premium for accountant risk insurance policy. The assessee's claim for such insurance premium was rejected in the assessment year 2010-11. However, in earlier years this claim had been allowed. The assessee in its accounts has used the term 'compensation' for penalties levied by the USA Authorities. The assessee has not disclosed whether any claim was made under the insurance policy for penalties imposed on it. During the course of assessment proceedings it came to light that though the insurance premium was paid by one PWC, the other networking firms were also under the risk covered.
(29) Learned Counsel then submitted that the assessees are Chartered Accountant firms, professionals and working in the services industries. If these two special incidents i.e. receipt of non-refundable grant and penalty are taken out from the profit and loss accounts of the assessees, it would appear that Lovelock and Lewes has incurred huge loss. Being in the service industry for several years, occurrence of huge loss is not comprehensible. It is only a window dressing of accounts made by the assessee which requires deeper and sustained investigations. (30) In the month of January/February, 2014 the investigation wing of the IT Department at Calcutta made enquiries pursuant to a tax evasion petition received in respect of PWH and Lovelock and Lewes. The ADIT (Investigation), Calcutta, in his report dated 17 February, 2014 has stated that the yearly payments made to Services BV by the writ petitioners were claimed as business expenses and such payments were made for services rendered by Services BV. The invoices did not specify the services allegedly rendered and only mentioned the period for which the payment was made. There was no concrete evidence to establish the actual expenditure claimed. Therefore, the expenditure was questionable from the tax angle. In another communication received from DIT (Investigation), Calcutta it was stated that though every year these assessees have paid service charges to Services BV ostensibly in lieu of services rendered by the latter, the nature of services are not clear. In view of these reports it is imperative to examine whether the payments for alleged services amounted to arm's length transaction under Sec. 92 of the IT Act. It was then submitted that as per Sec. 92CA(1) of the IT Act, if there is an international transaction and the Assessing Officer considers its necessary or expedient so to do, he may with the previous approval of the CIT, render the computation of the arm's length price in relation to the said international transaction to the TPO. The mandatory limit for reference, as per instruction no. 10 of 2013, is Rs. 15 crores. In this case, though the amount involved is below Rs. 15 crores, considering the peculiar facts of the case, the Assessing Officer after taking the approval of the CIT, referred the matter to the TPO. PWH is using the brand names of other PwC Networking firms and there is no explanation as to how PWH is operating with other Indian and Foreign Network Entities. International transaction includes use of intangible property and intangible property includes brand names. Hence, PWH is surely engaged in international transactions.
(31) In conclusion, learned Counsel submitted that Services BV clearly has financial and managerial control over PWH. Hence, the contention of the petitioner that the reference by the Assessing Officer to the TPO is without jurisdiction is meritless. Learned Counsel prayed for dismissal of the writ petition.
(32) On the point of law, learned Counsel submitted that at this stage, the Writ Court should not intervene. The issue of arm's length price has been referred to TPO. The Assessing Officer deemed it expedient to make such reference. The assessee will get an opportunity to urge its case before the TPO. Further, the opinion of the transfer pricing officer is not binding on the Assessing Officer. After the TPO sends his opinion/report to the Assessing Officer, before finalizing assessment, the Assessing Officer must give a hearing to the assessee. At that stage also, the assessee gets an opportunity of persuading the Assessing Officer as to why the opinion of the TPO should be ignored. Hence, no real prejudice is caused to the assessee by reference of the issue of computation of arm's length price by the Assessing Officer to the TPO. In this connection, learned Counsel relied on a decision of a Division Bench of the Delhi High Court in the case of Sony India (P) Ltd.-vs.-Central Board of Direct Taxes, (2006) 157 TAXMAN
125. (33) Learned Counsel also referred to a decision of a Division Bench of Gujarat High Court in the case of Veer Gems-vs.-Assistant Commissioner of Income Tax, (2013) 351 ITR 34, in support of his submission that there is no provision under Chapter X of the IT Act which requires the Assessing Officer to give an opportunity of hearing to the assessee, consider his objections and only thereafter make a reference to the TPO to compute the arm's length price. Further, the assessee has more than one opportunity to contest the question of presence or absence of an international transaction. Firstly, he has an opportunity before the TPO. Then, once the opinion of the TPO is transmitted to the Assessing Officer, the assessee has a second opportunity before the Assessing officer or the Dispute Resolution Panel as envisaged under Sec. 144C of the IT Act. (34) Mr. R. N. Bandyopadhyay then referred to an order of the Hon'ble Supreme Court in Maruti Suzuki India Ltd.-vs.-Additional Commissioner of Income Tax, (2011) 335 ITR 121. In that case the High Court had remitted the matter to the TPO with liberty to issue fresh show cause notice and decide the matter in accordance with law. However, the Supreme Court found that the High Court had made certain observations on the merits of the case and had given certain directions to the TPO which virtually concluded the matter. In those circumstances, the Hon'ble Apex Court directed the TPO to proceed with the matter in accordance with law uninfluenced by the observations/directions given by the High Court. (35) Learned Counsel then referred to an order dated 25 October, 2010 of the Hon'ble Apex Court in SLP (Civil) No. 646 of 2009 in the case of M/s. Coca Cola India Inc.-vs.-Additional Commissioner of Income Tax, in support of his submission that the Writ Court should not entertain a challenge to a reference made by the Assessing Officer to the TPO under the IT Act on the issue of transfer pricing since the same involves establishment of certain foundational facts which cannot be done by way of writ petition.
(36) Learned Counsel also referred to an order dated 10 July, 2012 passed by a Division Bench of the Karnataka High Court in ITA 826 of 2007 (M/s. Aztee Software & Technology-vs.-The Assistant Commissioner of Income Tax). In that case the Income Tax Tribunal had set aside the order of the CIT and had remanded the matter to the Assessing Officer with liberty to again refer the question of determination of arm's length price to the TPO. The income tax appeal challenging the Tribunal's order was dismissed by the High Court.
(37) Finally Learned Counsel referred to the Apex Court decision in the case of Raymond Woollen Mills Ltd.-vs.-Income Tax Officer, 236 ITR 34. In that case, the revenue contended that the assessee was charging to its profit and loss account, fiscal duties paid during the year as well as labour charges, power, fuel, wages, chemicals etc. However, while valuing its closing stock, the elements of fiscal duty and the other direct manufacturing costs were not included, resulting in undervaluation of inventories and understatement of profits. This information was obtained by the Revenue in a subsequent year's assessment proceeding and accordingly the Department had reopened the case. This was challenged by the assessee. The Hon'ble Apex Court held that the court was not to give a final decision as to whether there was suppression of material facts by the assessee or not. The court is 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 was not a thing to be considered at this stage. It would be open to the assessee to prove that the assumption of facts made in the impugned notice was erroneous. All questions of fact and law were left open to be investigated and decided by the assessing authority.
Court's View:-
(38) Although arguments have been advanced at length on behalf of the parties, the issue involved in the present proceeding is a short one, i.e. whether the reference made by the respondent no. 3 to the TPO under Sec.
92CA(1) of the IT Act in respect of the petitioner companies is without jurisdiction or otherwise incompetent so as to warrant judicial intervention.
(39) The sum and substance of the argument made by learned Senior Counsel for the petitioners is that the reference is without jurisdiction because: (i) a reference under Sec. 92CA can be made to the TPO only if there is an international transaction; (ii) for this purpose an 'international transaction' means a transaction between two or more associated enterprises; (iii) PWH and Services BV are not associated enterprises. Hence, PWH and Services BV are not involved in any international transaction for the purpose of Sec. 92CA(1) of the Act. (40) Mr. Pal, learned Senior Counsel, laid great emphasis on the Memorandum to the Finance Bill, 2002 and in particular the portion that has been extracted above, in support of his submission that Sec. 92A (1) cannot be read independently of Sec. 92A(2). In other words, according to him, mere participation by one enterprise in the management or control or capital of another enterprise would not make them associated enterprises unless and until at least one of the situations contemplated in sub-Secs. (a) to (m) of Sec. 92A (2) exists. Mr. Pal took pains to go through each of the said sub-Sections and submitted that none of those conditions are satisfied. Hence, the pre-condition for making a reference under Sec. 92CA(1) is absent, rendering the reference in the present case incompetent and without jurisdiction.
(41) Even if I were to accept the interpretation of Learned Senior Counsel given to Sec. 92A of the Act, I am unable to hold that the reference to the TPO is without jurisdiction. Sec. 92CA(1) envisages that where the assessing officer considers it 'necessary or expedient' to do so, he may with the approval of the Commissioner refer the computation of the arm's length price in relation to the concerned international transaction to the TPO. In my opinion, the said section does not contemplate that the assessing officer has to first come to a definite finding that there is an international transaction within the meaning of Sec. 92B before he can exercise his power to refer the matter to the TPO. So long as he is of a prima facie view that an international transaction is involved and it is necessary or expedient to refer the computation of the arm's length price in relation thereto to the TPO, he will be well within his powers to do so. It is needless to say that the proceeding before the TPO will be only upon notice to the assessee who will have full opportunity of urging before the TPO that no international transaction is involved. In the present case, PWH shall have full opportunity of impressing upon the TPO that it and Services BV are not associated enterprises. Whether or not Services BV participates directly or indirectly in the management or control or capital of PWH and whether or not at least one of the conditions mentioned in the sub-paragraphs (a) to (m) of Sec. 92A(2) of the Act is satisfied, are factual issues which the TPO is equipped and competent to decide. It is not proper or convenient nor desirable for a Writ Court to go into such disputed questions of fact.
(42) Further, the decision of the TPO is in the nature of an opinion. The TPO will send his opinion to the Assessing Officer who shall conduct the re- assessment proceeding taking into consideration such opinion of the TPO and upon notice to the assessee. The opinion of the TPO is not binding on the Assessing Officer. The assessee will have a second opportunity of arguing before the Assessing Officer or before the Dispute Resolution Panel as envisaged under Sec. 144C of the Act that the parties involved are not associated enterprises and hence there is no international transaction and consequently reference to the TPO was without jurisdiction. If so satisfied, the Assessing Officer would be at liberty to ignore the opinion/report of the TPO. This view of mine finds strong support from the Delhi High Court judgment in Sony India (P) Ltd.-vs.-Central Board of Direct Taxes (supra), and the Gujarat High Court judgment in the case of Veer Gems-vs.-Assistant Commissioner of Income Tax (supra). I must also keep in mind the observation of the Hon'ble Apex Court in the case of M/s. Coca Cola India Inc.-vs.-Additional Commissioner of Income Tax (supra), that the issue of transfer pricing involves establishment of certain foundational facts which cannot be dealt with in a writ petition. (43) In principle also I am of the view that the reference to the TPO under Sec. 92CA(1) of the Act should not be interfered with by the Writ Court at this stage. The nature of transaction between PWH and Services BV is not totally clear. There appears to be several service agreements between the two enterprises, one of 1998, the second one of 2009 and the third one of 2011. Admittedly PWH received a non-refundable amount of approximately Rs. 68.51 crores during the assessment year 2011-12 and also a non- refundable grant of approximately Rs. 20.76 crores during the assessment year 2010-11. The true nature of these receipts by PWH from Services BV needs to be ascertained. Nomenclature is not decisive. Showing the said amounts as non-refundable grants in the accounts of PWH may not reveal the true nature of such receipts. Further, PWH appears to have been making regular payments as service charges to Services BV but the nature of the services rendered by the said Dutch Company to PWH is not at all clear. The submissions made on behalf of the petitioners as regards the functions of Services BV and the services rendered by it are very general in nature and lacking in particulars and precision. At the cost of repetition, I say that the true nature and character of the transaction between PWH and Services BV requires to be ascertained and such factual issues cannot be and should not be gone into by the Writ Court. The IT Act has empowered the TPO to compute the arm's length price in relation to international transactions and the said statutory authority should be allowed to discharge its functions. It is open to the writ petitioner/assessee to impress upon the TPO that no international transaction is involved, in which case, the TPO will undoubtedly return an appropriate report to the Assessing Officer. In exercise of jurisdiction under Art. 226 of the Constitution of India, I am not in a position to hold that the factual issues contemplated in Sec. 92A(1) and (2) of the Act do not exist and as such the reference to the TPO was without jurisdiction. No case of mala fide or ex facie lack of jurisdiction has been made out by the petitioners and I am of the considered opinion that I should not stifle the reference to the TPO by nipping the same in the bud. If the stand of the writ petitioner company is bona fide and indeed if no international transaction is involved, I see no reason why the company should shy away from the proceeding before the TPO and not urge and establish the same in the proceeding before the TPO.
(44) Mr. Pal also submitted that in the assessment year 2010-11, the Department accepted the fact that the transactions between PWH and Services BV are not international transactions within the meaning of Sec. 92B of the Act. Hence, there can be no justification for the Department to take a different view for the subsequent year on the same set of facts. In this connection Learned Senior Counsel relied on a Supreme Court decision in the case of M/S. Radhasoami Satsang (supra). I am unable to subscribe to the contention that just because in a particular assessment year the transactions between the two parties were held not to be international transactions, in a subsequent year the transactions between those parties cannot be held to be international transactions. As I read the Hon'ble Supreme Court's decision referred to above, no absolute proposition of law to that effect has been laid down. New facts may emerge or old facts which were hitherto not in the knowledge of the Department may come to light justifying the Department taking a different view in a subsequent assessment year. In any event, it will be open for PWH to urge this point also before the TPO.
(45) The submission of Learned Counsel for the respondents as regards the compensation paid for penalties levied by the USA authorities by the PwC group of firms also warrants due consideration. Did PWH make any claim under the Insurance Policy for the penalties imposed on it? Is it correct that one PWC paid the insurance premium but all other networking firms were also covered by the Policy? These are also factors which will determine the true nature of relationship between PWH and BV Services. (46) In view of the aforesaid, I am not inclined to interfere with the orders under challenge at this stage. Diverse factual issues, some of which are intricate in nature, will have to be resolved in order to ascertain whether or not PWH and Services BV are involved in any international transactions within the meaning of Sec. 92B of the Act. The Writ Court is not a fact finding forum. It will be open to PWH to urge all points before the TPO that have been urged before me. I express no opinion on the merits of the case advanced by the respective parties and all points are left open for the TPO to decide in accordance with law including the point of maintainability of the reference made to him uninfluenced by any observation made in this judgment and order. In the event the TPO has conducted any proceeding ex parte or has passed any order under Sec. 92CA, the same shall stand set aside. The TPO shall issue a fresh notice to the assessee and hold proceedings afresh after giving full opportunity of hearing to the assessee. In conducting the proceeding, the TPO shall strictly adhere to the principles of natural justice and shall pass a reasoned order in accordance with law. (47) With the aforesaid observations WP Nos. 733 of 2014 and 735 of 2014 are disposed of. There will be no order as to costs.
(48) Urgent certified photocopy of this judgment and order, if applied for, be given to the parties upon compliance of necessary formalities.
(Arijit Banerjee, J.)