M/S.TORRY HARRIS SEA FOODS (PVT) LTD. vs. THE DY.COMMISSIONER OF INCOME TAX, ALAPPUZHA.

On facts, it need only be stated that the assessee had an international transaction as defined under Section 92B with an associated enterprise as defined under Section 92A of the Act. The price invoiced by the assessee was Rs.37,39,96,538/-. The Assessing Officer [A.O], referred it under Section 92CA of the Act and the Transfer Pricing Officer [TPO] determined the ALP at Rs.38,05,97,081/-. The difference was Rs.66,00,543/-, which was below 5%, ie. the ALP determined exceeded the invoice price only by less than 5%. The provision stood amended by Finance Act, 2009 w.e.f 01.10 2009, by introduction of two provisos. The second proviso permits adoption of the price at which the international transaction was undertaken if the variation between the invoiced price and the ALP does not exceed by a stipulated percentage. At the time of the subject amendment, the percentage was to be notified by the Central Government and by Finance Act, 2011 it was specified as 5% and now at 3%. However the amendment was only prospective and we have to look at the provisions as it existed in the subject assessment year, ie: 2005-06. 3. Section 92B(2) of the Act and the proviso therein as it existed and relevant for the subject assessment year does not provide such a computation or a deeming fiction as now available in the second proviso. It merely provided for a determination of ALP by the appropriate method and the option of the assessee is only when more than one price is determined by the most appropriate method. The proviso contemplated adoption of the arithmetic mean in such cases and an option was given to the assessee to seek adoption as ALP, a price which does not vary from the arithmetical mean in excess of 5%. The option so provided was to select one of the prices arrived at by the most appropriate method and not the invoiced price; the price at which the assessee asserted the transaction to have been undertaken. The provision applicable for the subject year was hence substantially different.

Smt.Nisha John, the learned Counsel for the assessee, points out that the Central Board of Direct Taxes [CBDT] has also issued a Circular bearing No.12/2001 dated 23.08.2001, wherein there is a specific restriction on the Assessing Officer to make any adjustments to the ALP determined by the tax payer, if such price is up to 5% less or up to 5% more, than the ALP determined by the A.O or the TPO. When the A.O. himself or the TPO on a reference, determines the ALP, necessarily the mitigation offered by the CBDT has to be applied with full force. In the present case, from the facts noticed, it is very clear that the ALP determined was not in excess of the invoice price by more than 5%. Reference is also made to the subsequent amendments made, introducing two provisos, which according to the Counsel, is in tandem with the Circular issued by the CBDT and later adopted in the statue itself. The amendment is clarificatory in nature is the submission of the learned Counsel for the assessee. In such circumstances, there is no warrant for the enhanced demand made by the A.O based on the ALP determined by the TPO is the argument.

Considering the intricacies in the matter, we appointed Sri.Raja Kannan as the Amicus Curiae. Sri.Raja Kannan points out that the proviso as it was introduced by Finance Act, 2001 with effect from 01.04.2002 did not provide for any option to the assessee. It only provided for determining the ALP applying the arithmetic mean, in case of there being more than one price determined by the most appropriate method. However, by Finance Act, 2002, again with effect from 01.04.2002, the proviso was amended bringing in the option, which, according to him, does not offer any mitigation to the assessee on the facts of this case, since there is not more than one price determined in so far as the international transaction, on which ALP was determined by the TPO. However, the CBDT Circular has provided a mitigation, which has to be applied with its full force. We in fact had raised a specific query at the last date of hearing as to whether the CBDT could have brought in such mitigation, quite contrary to the provision of law.

Reliance was placed on a judgment of the Hon'ble Supreme Court in UCO Bank Vs. Commissioner of Income Tax [(1999) 237 ITR 889. Therein the question arising under the I.T Act was whether the interest accruing in bad and doubtful debts could be taxed as an income. There was a Circular issued in the year 1952 by the CBDT, which provided that interest accrued to a money lender on bad and doubtful debts need not be included in the assessee's taxable income. However, the Kerala High Court expressed a contrary view in the case of State Bank of Travancore v. Commissioner of Income Tax [1977 110 ITR 336] and in such circumstance, the Circular of 1952 was withdrawn by a Circular of 1978. It was clarified that the interest thus credited to doubtful accounts, even if maintained as suspense accounts would be includable in the taxable income. Later, in the year 1984, the CBDT brought out a further Circular, specifying that such interest credited to bad and doubtful debts would be included in the taxable income only for three consecutive years; in which there is no recovery effected. After that, for the subsequent years, the interest even though accruing in the doubtful debts would not be taxable as income. It was also clarified that, if there is any recovery after the three year period, then only those amounts actually recovered would be taxable. The question arose as to whether the CBDT had the power to vary the provisions of the statute and offer a mitigation in excess of that provided in the statute. The Hon'ble Supreme Court held that: “The Board thus has power, inter alia, to tone down the rigour of the law and ensure a fair enforcement of its provisions, by issuing circulars in exercise of its statutory powers under section 119 of the Income-Tax Act which are binding on the authorities in the administration of the Act.”(sic)

We immediately notice that UCO Bank [supra] is no more good law for reason of the decision of a Constitution Bench of the Hon'ble Supreme Court in Commissioner of Central Excise v. Ratan Melting & Wire Industries [2008 (4) KLT 607 (SC)]. The larger bench considering the issue on a reference held that the courts or Tribunals, before whom a question of interpretation of a particular provision is raised, cannot rely on the Circulars issued by the Board, which is contrary to the declaration made by a Constitutional Court. It was also held that a Circular, which is contrary to the statutory provision, has no existence in law (para6).

The learned Senior Counsel, Government of India [Taxes] Sri.P.K.R. Menon, assisted by Sri.Navneeth S. Nath, takes us through the amendments brought in to the proviso. It is the argument of the learned Senior Counsel that the case of the assessee has to be decided on the basis of the proviso as it existed then. The proviso was first introduced in the year 2001, wherein it was only provided that when more than one price is determined by the most appropriate method, then the ALP has to be taken on the average of such prices. This proviso was brought in with effect from 01.04.2002. Circular No.12 of 2001 was dated 23.08.2001 in the financial year 2001-2002 [relevant to the assessment year 2002-2003]. Reference is made to the 2nd paragraph of the Circular to specifically point out that the Circular was in so far as the Rules being framed by the Board, only after the Finance Bill having received assent of the legislature and notified on 21.08.2001. Hence a mitigation was provided, in the case of assessees who had failed to maintain the prescribed information or documents in respect of the international transactions entered into during the period 01.04.2001 to 31.08.2001. The Rules having been brought in only on 21.08.2001, there was no possibility of the assessee being apprised of the requirements prescribed under the provisions; which prescription came long after the commencement of the relevant financial year. True, there was also a mitigation provided insofar as the ALP determined by the tax payer being in variation of 5% of the price for which the transaction was undertaken. However, the same applies only to the proviso that was brought in by Finance Act 2001 with effect from 01.04.2002. The proviso so brought in by Finance Act, 2001 was never enforced since Finance Act, 2002 amended the proviso again with effect from 01.04.2002 itself. Hence, the mitigation provided insofar as the ALP being determined with reference to the invoiced price of the assessee does not at all apply. The Circular was not with respect to the amended proviso, brought in by Finance Act,2002; which was also made applicable from 01.04.2002, is the compelling argument.

We have to first notice the amendments brought in, in the subsequent years. Section 92C(2) read as follows, as it existed: “(2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed”. A proviso was added by Finance Act, 2001, with effect from 01.04.2002, which reads as below: “Provided that where more than one price may be determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices”. The proviso was substituted by Finance Act, 2002, again with effect from 01.04.2002, as follows: “Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean”.

The proviso applicable for the assessment year is that brought in by Finance Act, 2002 with effect from 01.04.2002. The proviso introduced by Finance Act, 2001 did not have an option which the Board provided in the Circular. Even if the said option as provided in the Circular is taken as a mitigation of the rigour of the provision; it is to be noticed that the proviso without the option never came into force; the same having been substituted with the proviso by Finance Act, 2002; which had an option but not in tune with that provided in the Circular of the Board. When the proviso as brought in by the Finance Act, 2002 came into effect, the Circular, to the extent of the option granted, stood contrary to the statutory provision.

As was rightly noticed by the Tribunal, there is a peculiar circumstance insofar as the Finance Act, 2001 having originally inserted Section 92C along with a proviso with effect from 01.04.2002, which proviso, however, was substituted by Finance Act, 2002; again with effect from 01.04.2002. The proviso as introduced by Finance Act, 2001, hence, is not in operation for any period. Circular No.12 of 2001, issued to explain the amendments made by the Amendment Act, 2001 has no effect. We agree with the said finding of the Tribunal and add that the Circular can have effect only insofar as the mitigation provided to an assessee who has not been apprised of the requirements of the maintenance of prescribed information or documents in respect of transactions between 01.04.2001 and 31.08.2001. This is for reason of the Rules being notified in the midst of the year.

Computation of ALP as provided under Section 92C can be under any of the methods enumerated under clauses (a) to (f) of sub-section (1), having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such other persons or such other relevant factors as the Board may prescribe. In the present case, there is only one ALP determined by the TPO in accordance with one of the appropriate

We also have to notice that subsequently sub-section (2A) was was brought into Section 92C by Finance Act, 2012, which reads as follows: “(2A) Where the first proviso to sub-section (2) as it stood before its amendment by the finance (No.2) Act, 2009 (33 of 2009), is applicable in respect of an international transaction for an assessment year and the variation between the arithmetical mean referred to in the said proviso and the price at which such transaction has actually been undertaken exceeds five per cent of the arithmetical mean, then, the assessee shall not be entitled to exercise the option as referred to in the said proviso”.

This demolishes the contention of the assessee that the amendments in 2009 are clarificatory in nature. Hence, the statute, for the relevant year, did not at all provide an acceptance of the invoiced price on any count and not at all on the ground that the difference between the invoiced price and the ALP determined not exceeding 5%. The mitigation provided by the CBDT is on the proviso introduced by the Finance Act, 2001. The same cannot be applied to the proviso introduced by way of substitution, by the Finance Act, 2002. The substituted proviso, which applied from 01.04.2002 erased the earlier proviso from the statute totally. It granted an option to the assessee; but only insofar as adopting one of the prices from which the average price is determined; that too in cases of more than one price being determined under the most appropriate method. In such circumstances, we answer the question of law framed in favour of the Revenue and against the assessee. We affirm the order of the Appellate Tribunal.