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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
Before: SHRI PRASHANT MAHARISHI, AM & SHRI AMARJIT SINGH, JM
PER PRASHANT MAHARISHI, AM:
This appeal is filed by Bhavani Gems Private Limited (the assessee/ appellant) against the order passed under section 263 of The Income-Tax Act, 1961 (the Act) by the Pr. Commissioner of Income-Tax -5, Mumbai (the learned PCIT) dated 26th March, 2021, wherein it has been held that the assessment order passed under section 143(3) of the Act dated 21.11.2018 by the Asst. Commissioner of Income- tax, Circle 5(1)(1), Mumbai (the learned Assessing Officer) for AY 2016-17 is erroneous and prejudicial to the interest of Revenue.
“1. On the facts and in the circumstances of the case, the order passed by the learned Pr. CIT Mumbai 5 u/s 263 of the Income–tax Act is ab initio void being bad in law.
On the facts and in the circumstances of the case, the learned Pr. CIT erred in setting aside the assessment order dated 21/11/2018 passed under section 143(3) of the Act and directing the Assessing Officer to pass a fresh Assessment order.”
Brief fact of the case shows that assessee is a company engaged in the business of manufacturing of rough Diamond into cut and polished diamonds and trading and export. It filed its return of income on 26.11.2016 at Rs. 9,44,48,840/-. This return was processed under section 143(1) of the Act. Subsequently, case of the assessee was picked up for scrutiny for examination of eight different items. These are as under:-
i. Sale consideration of property in ITR is less than sale consideration reported in form no. 26QB
ii. Tax credit claim in ITR is less than tax credit available in 26AS
iii. Gross total income is less than value of foreign remittance sent.
v. Sale consideration of the property in ITR is less than sale consideration of property reported in AIR.
vi. Huge loss from current year fluctuations.
vii. Large other expenses claimed in the profit and loss account.
viii. Large current liability in comparison to total asset in Balance sheet.
Thereafter, the respective notices were issued and the income of the assessee was assessed at Rs. 9,44,48,480/- at returned income vide assessment order dated 21.11.2018 passed under section 143(3) of the Act.
The learned PCIT examined assessment records and found that Assessing Officer has not referred International Transactions and Specified Domestic Transactions (SDT) to the transfer-pricing officer for determination of Arms Length Price. Form No. 3CEB report shows international transactions of Rs. 133.76 crores and specified domestic transactions of Rs. 20.89 crores. Case of assessee was also selected for scrutiny for reason that large outward remittance to non-resident is made. It was also noted that the
learned PCIT passed an order under section 263 of the Act stating that as assessee has entered into several international transactions and specified domestic transactions, the Assessing Officer should have referred the matter to Transfer Pricing Officer for determination of arms length price. It further held that it is binding on the Assessing Officer to refer these issues to the Transfer Pricing Officer even though, the Assessing Officer may be of an opinion that international transactions are at arm’s length. The learned PCIT noted that assessee has claimed depreciation of Rs. 4.87 crores on goodwill of Rs. 14.62 crores that were generated by conversion of partnership firm. As the goodwill was internally generated and not acquired or purchased, cost of the same should have been taken at Rs Nil and no depreciation could have been allowed to the assessee. Therefore, on this account also, as the learned Assessing Officer has not made any enquiry, hence, the order of the Assessing Officer is erroneous.
i. refer the international and specified domestic transactions to the jurisdictional transfer pricing Officer (TPO) and
ii. make further inquiries verifications into the claim of depreciation and written down value of the goodwill for carry forward
Assessee is aggrieved with that order and has preferred this appeal before us. The learned authorised representative submitted that:-
i. Case of the assessee was selected for scrutiny Under CASS . According to the scrutiny issues, there was no issue of examination of international transactions and Specified Domestic Transactions and its Arms Length Price. Therefore, the case of the assessee was not selected for scrutiny on transfer pricing risk parameters; therefore, there was no requirement of referring the matter to the learned transfer-pricing officer for determining arm’s-length price of international and specified domestic transactions.
iii. He further referred to circular dated 10.03.2016, which was in replacement of instruction no. 15/2015. He submitted that according to paragraph no. 3.1 only where the Assessing Officer considers it ‘necessary or expedient’, he may refer the computation of Arms Length Price in relation to international transactions or specified transactions. He submitted that according to paragraph no. 3.3, cases selected for scrutiny on non-transfer pricing risk parameters, also having international transactions, matter should be
iv. He also referred to the decision of the co- ordinate bench in ITA No. 2/ Jodh/ 2021 in case of Secure Meters Limited Vs. PCIT dated 07.09.2021 and submitted that on identical issues the co-ordinate Bench has decided the issue in favour of the assessee. He extensively referred to paragraph no.20 of that order. Therefore, he submitted that the issue squarely covered in favour of the assessee by the decision of the coordinate bench.
v. He further referred to the decision of co- ordinate Bench in Amira Pure Foods Pvt. Ltd v. PCIT (2018) 63 ITR (Trib) 355 (Delhi) (Trib).
vii. He referred to the decision of Ahmadabad Bench in case of Bodal Chemicals Ltd. vs. ACIT 112 taxmann.com 217 (Ahmedabad-Trib.) to support that the depreciation cannot be disturbed in subsequent years when in the first year itself the assets entered into the block of assets and depreciation is continuously allowed. For this proposition and he also relied on the decision of co-ordinate Bench in the case of 3861/Mum/2014 dated 21.06.2017. Accordingly, he submitted that the direction of the LD PCIT on this issue is also not in accordance with law.
viii. Therefore, he submitted that the order passed by the learned PCIT is not sustainable.
The learned Authorized Representative in rejoinder reiterated his submission.
We have carefully considered the rival contention and perused the orders of the lower authorities. Assessee has
(i) sale consideration of property in ITR is less than the sale consideration reported in form number 26QB (ii) tax credit claimed in ITR is less than the tax credit available in 26AS (iii) gross total income is less than the value of foreign remittances sent (iv) mismatch between income/receipt credited to profit and loss account considered Under other heads of income and income from heads of income other than business/profession (v) sale consideration of the property in ITR is less than the sale consideration of property reported in AIR (vi) Huge loss from currency fluctuations (vii) large current liabilities in comparison to total asset in balance sheet
The learned assessing officer after examination of the detail passed an assessment order u/s 143 (3) of the act on 21/11/2018 accepting returned income of the assessee. Subsequently on examination of the records, the learned PCIT found that assessee has filed form number 3CEB report which shows that international transaction of ₹ 133.76 crores and specified domestic transactions of ₹ 20.89 crores are entered into with its associated enterprises. It was also noted that assessing officer has allowed depreciation on goodwill of ₹ 4.87 crores and incorrect carry forward of written down value of ₹ 14.62 crores in respect of the self-generated goodwill was allowed. Therefore, a notice u/s 263 of the income tax act
SECTION 92C OF THE INCOME-TAX ACT, 1961 - TRANSFERPRICING - COMPUTATION OF ARM'S LENGTH PRICE GUIDELINES IMPLEMENTATION FOR
INSTRUCTION NO.3/2016 [F.NO.500/9/2015-APA- II], DATED 10-3-2016
The provisions relating to transfer pricing are contained in sections 92 to 92F in Chapter X of the Income-tax Act, 1961. These provisions came into force w.e.f. Assessment Year 2002-2003 and have seen a number of amendments over the years, including the insertion of Safe Harbour and Advance Pricing Agreement provisions and the extension of the applicability of transferpricingprovisions to Specified Domestic Transactions.
In terms of the provisions, any income arising from an international transaction or specified domestic transaction between two or more associated enterprises shall be computed having regard to the Arm's Length Price. Instruction No. 3 was issued on 20th May, 2003 to provide guidance to the Transfer Pricing Officers (TPOs) and the Assessing Officers (AOs) to operationalise the transfer pricing provisions and to have procedural uniformity. Due to a number of legislative, procedural and structural changes carried out over the last few years, Instruction No. 3 of 2003 was replaced with Instruction No. 15/2015, dated 16th October, 2015. After the issuance of Instruction No. 15/2015, the Board has received some suggestions and
Reference to Transfer Pricing Officer (TPO)
3.1 The power to determine the Arm's Length Price (ALP) in an international transaction or specified domestic transaction is contained in sub- section (3) of section 92C. However, section 92CA provides that where the Assessing Officer (AO) considers it necessary or expedient so to do, he may refer the computation of ALP in relation to an international transaction or specified domestic transaction to the TPO. For proper administration of the Income-tax Act, the Board has decided that the AO shall henceforth make a reference to the TPO only under the circumstances laid out in this Instruction.
3.2 All cases selected for scrutiny, either under the Computer Assisted Scrutiny Selection [CASS] system or under the compulsory manual selection system (in accordance with the CBDT's annual instructions in this regard -for example. Instruction No. 6/2014 for selection in F.Y 2014-15 and Instruction No. 8/2015 for selection in F.Y 2015-16), on the basis of transfer pricing risk parameters [in respect of international transactions or specified domestic transactions or both]
3.3 Cases selected for scrutiny on non- transferpricing risk parameters but also having international transactions or specified domestic transactions, shall be referred to TPOs only in the following circumstances:
(a) where the AO comes to know that the taxpayer has entered into international transactions or specified domestic transactions or both but the taxpayer has either not filed the Accountant's report under section 92E at all or has not disclosed the said transactions in the Accountant's report filed; (b) where there has been a transferpricing adjustment of Rs. 10 Crore or more in an earlier assessment year and such adjustment has been upheld by the judicial authorities or is pending in appeal; and (c) where search and seizure or survey operations have been carried out under the provisions of the Income-tax Act and findings regarding transferpricing issues in respect of international transactions or specified domestic transactions or both have been recorded by the Investigation Wing or the AO.
3.4 For cases to be referred by the AO to the TPO in accordance with paragraphs 3.2 and 3.3 above, in respect of transactions having the following situations,
♦ where the taxpayer has not filed the Accountant's report under section 92E of the Act but the international transactions or specified domestic transactions undertaken by it come to the notice of the AO; ♦ where the taxpayer has not declared one or more international transaction or specified domestic transaction in the Accountant's report filed under section 92E of the Act and the said transaction or transactions come to the notice of the AO; and ♦ where the taxpayer has declared the international transactions or specified domestic transactions in the Accountant's report filed under section 92E of the Act but has made certain qualifying remarks to the effect that the said transactions are not international transactions or specified domestic transactions or they do not impact the income of the taxpayer.
In the above three situations, the AO must provide an opportunity of being heard to the taxpayer before recording his satisfaction or otherwise. In case no objection is raised by the taxpayer to the applicability of Chapter X [Sections 92 to 92F] of the Act to these three situations, then AO should refer the international transaction or specified domestic transaction to the TPO for determining the ALP after obtaining the approval of the PCIT or CIT. However, where the applicability of Chapter X [Sections 92 to 92F] to these three situations is objected to by the taxpayer, the AO must consider the taxpayer's objections and pass a speaking order so as to comply with the principles of natural justice. If the
3.5 In addition to the cases to be referred as per paragraphs 3.2 and 3.3, a case involving a transfer pricing adjustment in an earlier assessment year that has been fully or partially set-aside by the ITAT, High Court or Supreme Court on the issue of the said adjustment shall invariably be referred to the TPO for determination of the ALP.
3.6 Since the provisions of section 92CA of the Act, inter-alia, refer to the computation of the ALP of the international transaction or specified domestic transaction, it is imperative for the AO to ensure that all international transactions or relevant specified domestic transactions or both, as the case may be, are explicitly mentioned in the letter through which the reference is made to the TPO. In this regard, guidelines as under may be followed:
(a) If a case has been selected for scrutiny on a TP risk parameter pertaining to international transactions only, then the international transactions shall alone be referred to the TPO; (b) If a case has been selected for scrutiny on a TP risk parameter pertaining to specified domestic transactions only, then the specified domestic transactions shall alone be referred to the TPO; and (c) If a case has been selected for scrutiny on the basis of TP risk parameters pertaining to both international transactions and specified domestic transactions, then the international transactions and the specified domestic transactions shall together be referred to the TPO.
3.7 For administering the transferpricing regime in an efficient manner, it is clarified that though AO has the power under section 92C to determine the ALP of international transactions or specified domestic transactions, determination of ALP should not be carried out at all by the AO in a case where reference is not made to the TPO. However, in such cases, the AO must record in the body of the assessment order that due to the Board's instruction on this matter, the transfer pricing issue has not been examined at all.”
In view of the above instructions it is necessary to examine that whether the learned assessing officer was duty-bound to hundred make a reference to the learned transfer pricing officer for determination of the arm’s- length price of international transactions and specified domestic transactions or not. If the learned assessing officer has violated the instructions stated above, the order of the learned assessing officer is erroneous and
Further the learned authorised representative has relied upon decision of the coordinate bench in case of secure meters Ltd versus principal Commissioner of income tax ITA number 02/Jodh/2021 wherein identical issue has been decided by the coordinate bench following decision of Amira pure foods private limited (2018) 63 ITR (Trib) 355 (Delhi) wherein it has been held that when a case is selected for scrutiny on non-TP risk parameters, it is not mandatory for the learned assessing officer to refer the matter to the learned transfer pricing officer for determination of arm’s-length price of international
Accordingly, on the first ground of non-reference to the learned transfer pricing officer we do not find any infirmity in the order passed by the learned assessing officer by not referring it to the learned transfer pricing officer for determination of arm’s-length price of the international transactions and specified domestic transaction and therefore the order of the learned that AO is not erroneous and hence cannot be subject to revision u/s 263 of the act.
Coming to the second issue of depreciation on goodwill, the fact shows that the assessee company has acquired all assets and liabilities including goodwill from one partnership firm M/s Bhavani Gems four consideration of ₹ 230 crores out of which ₹ 26 crores were paid towards goodwill. The goodwill entered into the block of assets on 27th of March 2012 and depreciation on the same has been claimed till assessment year 2015 – 16 approximately of ₹ 6.5 crores resulting into an operating block of assets as on 1 April 2015 of ₹ 19.50 crores. The assessee has been allowed depreciation on this goodwill in assessment year 2015 – 16 in the order passed u/s 143 (3) of the act for that year. The assessment year 2015 – 16 has neither been reopened u/s 147 of the act or any remedial action initiated u/s 263 of the act. Therefore it is apparent that
In view of this, we hold that the order passed u/s 263 of the income tax act; dated 26th of March 2021 by the learned principal Commissioner of income tax is not sustainable and hence quashed.
Order pronounced in the open court on 29.04.2022.
Sd/- Sd/- (AMARJIT SINGH) (PRASHANT MAHARISHI) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) Mumbai, Dated: 29.04.2022 Sudip Sarkar, Sr.PS Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. The CIT(A) 4. CIT DR, ITAT, Mumbai 5. 6. Guard file. BY ORDER, True Copy//
Sr. Private Secretary/ Asst. Registrar Income Tax Appellate Tribunal, Mumbai