THE COMMISSIONER OF INCOME TAX vs. M/S SIGMA ALDRICH FOREIGN HOLDINGS CO

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ITA/770/2008HC KarnatakaKAHC01036376200819 August 2014Bench: N.KUMAR,RATHNAKALA8 pages
AI SummaryDismissed

What did the High Court hold?

The High Court held that the Income Tax Appellate Tribunal (ITAT) was justified in setting aside the order passed by the Commissioner of Income Tax (International Taxation) under Section 263 of the Income Tax Act, 1961. The Court noted that the assessee had multiple meetings with the Additional Commissioner and the Commissioner of Income Tax (International Taxation) before filing the revised return. These discussions led to an agreement, in terms of which the revised return was filed and tax was paid. The Court emphasized that Section 263 proceedings are quasi-judicial. When the authority invoking Section 263 was a party to the earlier proceedings and had approved the revised return and payments, it was not open for him to revise the same assessment under Section 263. The Court observed that the essential ingredients for invoking Section 263, namely that the order passed by the assessing authority is erroneous and prejudicial to the interest of the revenue, were conspicuously missing in the notice and the subsequent order. If the order was erroneous, the Commissioner would also be equally responsible, having been consulted. Therefore, the substantial question of law was answered in favour of the assessee and against the revenue. The appeal was dismissed.

What were the facts?

The assessee, M/s. Sigma Aldrich Foreign Holdings Co., a branch of a foreign company, is a non-resident assessed to tax in India. For Assessment Year 2001-02, the assessee filed an original return and later a revised return claiming deduction for computer software. No notice under Section 143(2) or 142(1) was issued. For Assessment Year 2002-03, the assessee made a transfer pricing adjustment of Rs. 2,26,05,461/-. Following discussions with the assessing officer and the Commissioner of Income Tax (International Taxation), the assessee filed a revised return for AY 2001-02, offering additional income voluntarily. The assessment order was passed based on a net margin of 3% as per TNMM method, derived from these discussions. Subsequently, the Commissioner of Income Tax (International Taxation) issued a notice under Section 263 of the Income Tax Act, 1961, proposing to revise the assessment order. The assessee objected, but the Commissioner passed a revision order. The Income Tax Appellate Tribunal (ITAT) set aside the Commissioner's order, finding that the prerequisite conditions for invoking Section 263 were not met.

What were the issues?

1. Whether the Income Tax Appellate Tribunal (ITAT) was justified in setting aside the order passed by the Commissioner of Income Tax (International Taxation) under Section 263 of the Income Tax Act, 1961, when the revised return was filed after discussions with the Commissioner and the assessing authority? Assessee's Contention: The assessee argued that they voluntarily offered tax for a period anterior to the arising of the liability to 'buy peace' and maintain good relations with the department. This offer was made after extensive discussions and negotiations with the Additional Commissioner and the Commissioner of Income Tax (International Taxation). Since the Commissioner was a party to these discussions and approved the revised return and subsequent payments, it was not open for him to initiate proceedings under Section 263 to revise the very assessment he had implicitly agreed to. The Tribunal was therefore justified in setting aside the Section 263 order. Revenue's Contention: The revenue contended that while the Commissioner was consulted before filing the revised return, the proceedings under Section 263 were initiated in respect of matters where he was not consulted. Therefore, on this ground, the ITAT's order setting aside the Commissioner's order could not be sustained.

Which sections of the Income-tax Act were involved?

Section 263,Section 139(1),Section 143(2),Section 142(1),Section 92,Section 92C(3),Section 260-A

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF KARNATAKA AT BANGALORE

Dated this the 19th day of August, 2014 PRESENT

THE HON’BLE MR. JUSTICE N KUMAR

AND

THE HON’BLE MRS. JUSTICE RATHNAKALA

ITA No.770 of 2008 BETWEEN:

1.

The Commissioner of Income Tax

(International Taxation)

Rashtrothana Bhavan

Nrupathunga Road

Bangalore

2.

The Assistant Commissioner

of Income Tax

(International Taxation)

Circle – 19(1)

Rashtrothana Bhavan

Nrupathunga Road

Bangalore

…Appellants

(By Sri K. V. Aravind, Advocate)

AND:

M/s. Sigma Aldrich Foreign Holdings Co., 31/1, Seetharampalya Mahadevapura Post

Bangalore – 560 048

…Respondent

(By Sri Chythanya K. K., for M/s. Raghuraman & Chythanya, Advocates)

This ITA filed under Section 260-A of IT Act, 1961 arising out of order dated 11-03-2008 passed in ITA No.388/BNG/2006, for the Assessment year 2001-02 to 2002-03, praying to (i) formulate the substantial questions of law stated therein; (ii) allow the appeal and set aside the order passed by the ITAT, Bangalore in ITA No.388/BNG/2006, dated 11/03/2008 confirm the orders of the Appellate Commissioner and Assistant Commissioner of Income Tax (International Taxation), Circle-19(1), Bangalore.

This ITA coming on for hearing this day, N. KUMAR J delivered the following:

J U D G M E N T

The revenue has preferred this appeal against the order passed by the Tribunal which has set aside the order passed by the Commissioner under Section 263 of the Income Tax Act, 1961 (hereinafter for short referred to as ‘the Act’).

2.

The assessment year is 2001-02. The assessee is a branch of a foreign company and is assessed to tax in India in the status of a non-resident. For the assessment year

2001-2002 the assessee filed return of income under Section 139(1) of the Act on 31.10.2001. The aforesaid return was revised on 24.10.2002 for claiming deduction towards computer software as revenue expenditure which was omitted in the original return. No notice under Section 143 (2) or 142 (1) was issued for the above returns. When the assessment proceedings for 2001-2002 were pending, the assessee filed return of income for the assessment year 2002-03. In this return, the assessee made adjustment of Rs.2,26,05,461/- as transfer pricing adjustment under Section 92 read with Section 92C (3) of the Act. On account of this adjustment, the assessing authority and the Commissioner of Income Tax (International Taxation) insisted that the assessee shall offer additional income tax on similar basis for all the assessment years beginning with assessment year 1998-99. After having discussions with the assessing officer as well as the Commissioner of Income Tax (International Taxation), the assessee filed revised return for the assessment year 2001-02 offering certain income to tax

on voluntary basis in order to buy peace from the Department. The assessment order was passed.

3.

In the assessment order, the assessing authority has observed that, in the revised return filed net margin as per TNMM method is taken at 3%. These adjustments for the purpose of transfer pricing are done after discussions.

4.

It is thereafter, the Commissioner of Income Tax (International Taxation) issued notice dated 9.3.2004 to the assessee proposing to revise the revised assessment completed on 6.6.2003. The assessee objected to the same by filing a detailed objection. Over-ruling the said objection, the Commissioner proceeded to pass an order revising the revised return.

5.

Aggrieved by the said order, the assessee preferred an appeal before the Tribunal. The Tribunal by the impugned order held that, neither at the time of issuing

show notice nor at the time of passing an order under Section 263 of the Act concluded that the assessment was erroneous and prejudicial to the interest of the revenue which is a pre requisite for invoking the provisions of Section 263 of the Act. However, the Tribunal held that, the revised return was filed by the assessee after discussion with the Commissioner of Income Tax and, therefore, he could not have initiated proceedings under Section 263 of the Act. Therefore, the order under Section 263 was set aside. Aggrieved by the said order, the revenue is before this Court.

6.

Learned counsel for the revenue assailing the impugned order contended that, though the Commissioner was consulted before filing revised return, the proceedings under Section 263 is initiated in respect of matters where he was not consulted and, therefore, on that ground the order cannot be set aside.

7.

Per contra, the learned counsel for the assessee submitted that, though the assessee was not due in any amount, in order to have good relationship and purchase peace, they offered to pay tax even for a period anterior to the day from which the liability under the Act arose and the percentage was arrived at after such negotiations and when amount was paid, it was not open to the Commissioner to initiate proceedings under Section 263 of the Act and, therefore, he submits the Tribunal was justified in setting aside the said order.

8.

At the time of filing of the revised return, the assessee addressed a letter dated 25.3.2003. Reference Nos. 3 and 4 reads as under:- “3) Our meeting with Additional Commercial of Income Tax (International Taxation) on 04-02-2003, 17-02-2003, 19-02-2003, 27-02- 2003, 04-03-2003, 10-03-2003, 12-03-2003 and 18-03-2003.

4) Our meeting with the Commissioner of Income Tax (International Taxation) on 20-03- 2003.”

9.

The fact that the assessee had a meeting with the Additional Commissioner of Income Tax (International Taxation) on various dates mentioned therein and also had a meeting with the Commissioner of Income Tax (International Taxation) on 20.3.2003 is not disputed. There were discussions and then an agreement was reached and in terms of the agreement revised return was filed and tax was paid. The transactions under Section 263 is a quasi judicial proceedings. When the person who invoked the said provision was a party to the earlier proceedings and on his approval revised return was filed, payments were made, it was not open to him to revise the said assessment under Section 263 of the Act. Obviously that is the reason why either in the notice issued or in the subsequent order, the words “the order passed by the assessing authority is prejudicial and erroneous to the interest of the revenue” is

conspicuously missing. If the order is erroneous the Commissioner also would be equally responsible because he was consulted before filing the revised return. Under these circumstances, the Tribunal was justified in setting aside the said order. The substantial question of law is answered in favour of the assessee and against the revenue. There is no merit in this appeal and accordingly it is dismissed.

Sd/- JUDGE

Sd/- JUDGE

ckl/-

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