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Sgs India Pvt. Ltd. v. Assistant Commissioner Of Income-Tax And Another
Case Summary — J.P. Devadhar, J.
Factual and Procedural Background
The petitioner, a business providing verification, inspection and certification services in India, filed its original return for AY 2001-2002 on 30 October 2001 declaring taxable income of Rs. 8,42,67,317/-, later revising it to Rs. 8,19,03,180/- due to a change in depreciation claim. The return was processed under section 143(1) by intimation dated 24-4-2003 and then taken up for scrutiny by issuance of a detailed questionnaire dated 21-10-2003, which expressly sought particulars concerning payments for a technical know-how team and research and development (R&D) expenses. The assessing officer passed an assessment order under section 143(3) dated 11-2-2004 disallowing part of the technical know-how team expenses and allowing the R&D deduction as claimed.
By notice dated 25-5-2005 issued under section 148, the assessing officer sought to reopen the assessment for AY 2001-2002, recording reasons which relied on findings in the assessment order for AY 2002-2003 (specifically, that R&D expenditure paid to SGS Switzerland had been held not to be at arm's length and disallowed in AY 2002-2003). The petitioner filed objections on 11-9-2006, which were rejected by order dated 21-11-2006. The petitioner challenged the reopening notice and the rejection order by the present writ petition, taken up for final hearing by consent.
Legal Issues Presented
- Whether the assessment for AY 2001-2002 could be validly reopened under section 148 on the basis of findings recorded in the assessment order for AY 2002-2003.
- Whether reliance on the subsequent assessment (AY 2002-2003) — which applied Transfer Pricing Regulations effective 1-4-2002 — can furnish a valid reason to believe that income chargeable to tax escaped assessment for AY 2001-2002, when those regulations were not applicable to AY 2001-2002.
Arguments of the Parties
Petitioner's Arguments (Mr. Pardiwala)
- There was full disclosure of material relating to R&D fees during the original assessment proceedings and, after detailed inquiry, the assessing officer had allowed those expenses; therefore there was no reason to believe that income had escaped assessment to justify reopening under section 148.
- The assessing officer sought to reopen solely on the basis of the assessment order for AY 2002-2003, where R&D expenses were disallowed as not being at arm's length under section 92CA(3). The Transfer Pricing provisions were introduced w.e.f. 1-4-2002 (applicable from AY 2002-2003), and thus could not be applied to AY 2001-2002; reopening based on the later year's order was unjustified.
- Reliance was placed on authority (including Commissioner Of Income-Tax v. Kelvinator Of India Ltd., German Remedies Ltd. v. Dy. CIT, and CIT v. Smt. Maniben V. Shah) for the proposition that a mere change of opinion cannot be the basis for reopening a completed assessment.
Respondent's Arguments (Mr. Kotangale)
- The reopening was not founded on the law that came into force on 1-4-2002 but on material gathered from the assessment order for AY 2002-2003.
- Reliance on decisions (Consolidated Photo Finvest Limited v. ACIT; Ess Ess Kay Engineering Co. P. Limited v. CIT; CIT v. P.V.S Beedieo Pvt. Ltd.) to submit that action under section 147 is permissible even if the assessing officer's reasons to believe are gathered from the same record that had been the subject-matter of completed assessment proceedings.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner Of Income-Tax v. Kelvinator Of India Ltd. | Proposition that mere change of opinion cannot form the basis for reopening a completed assessment. | The decision was cited by petitioner's counsel; the court treated this principle as supporting the petitioner's contention that mere change of opinion (or reliance solely on subsequent year's findings based on different law) cannot justify reopening. |
| German Remedies Ltd.… v. Dy. Commissioner Of Income-Tax…. (2006 (1) Mh. L.J 517 : 285 ITR 26) | Proposition that mere change of opinion cannot form the basis for reopening a completed assessment. | Cited by petitioner; the court relied on the underlying principle in concluding that reopening was not sustainable where it amounted to a change of opinion based on provisions not applicable to the year under consideration. |
| CIT v. Smt. Maniben V. Shah (283 ITR 453) | Proposition that mere change of opinion cannot form the basis for reopening a completed assessment. | Cited by petitioner and treated by the court as a supporting authority for denying reopening where the basis was a subsequent year's finding under different law. |
| Consolidated Photo Finvest Limited v. ACIT (151 Taxman 41 (Delhi)) | Authority relied upon by revenue for the proposition that action under section 147 is permissible even if AO gathered reasons from the same record as the completed assessment. | Cited by revenue; the court held this decision to be distinguishable on facts because in the present case there was a change in law in the subsequent year, so the principle did not justify reopening AY 2001-2002 based on AY 2002-2003 findings. |
| Ess Ess Kay Engineering Co. P. Limited v. CIT (247 ITR 818) | Authority relied upon by revenue for the proposition that reopening under section 147 may be based on material already in the earlier record. | Cited by revenue; the court found it distinguishable and not applicable because the subsequent year's assessment applied Transfer Pricing Regulations not applicable to AY 2001-2002. |
| CIT v. P.V.S Beedieo Pvt. Ltd. (237 ITR 13) | Authority relied upon by revenue for the proposition that section 147 action can be founded on material from completed assessment records. | Cited by revenue; the court held the decision distinguishable on the ground that there was no change in law in those cases, unlike the present matter, and therefore it could not support reopening here. |
Court's Reasoning and Analysis
The court examined the reasons recorded for reopening and found that they were premised on findings in the assessment order for AY 2002-2003 — namely, that certain R&D payments to SGS Switzerland were not at arm's length and were disallowed on transfer pricing grounds. The court noted that Transfer Pricing Regulations became effective from 1-4-2002 and applied from AY 2002-2003 onwards; those regulations were not applicable to AY 2001-2002.
The court accepted the petitioner's contention that the assessing officer's reasons were based solely on the subsequent year's order and the legal basis employed in that order (transfer pricing provisions) could not be retroactively applied to AY 2001-2002. The court observed that the assessing officer did not point to any provision applicable to AY 2001-2002 that contradicted the deduction allowed in the section 143(3) assessment. The court further noted that the impugned expenses had been incurred with FIPB and RBI approvals.
Regarding authorities cited by the revenue, the court reasoned that those decisions were distinguishable because, in those cases, there had been no change in law between the assessment years such that reasons to believe could be drawn from subsequent assessment orders. In contrast, the present case involved a change in law (introduction of Transfer Pricing Regulations), and therefore the subsequent assessment order could not furnish valid reasons to reopen the earlier year.
Holding and Implications
Holding: The petition succeeds. The impugned notice dated 25th May, 2005 issued under section 148 for reopening AY 2001-2002 is quashed and set aside. The rule is made absolute in terms of the order with no order as to costs. (Petition allowed.)
Implications: The direct effect is that the reopening of the assessment for AY 2001-2002 is invalidated and the assessing officer's notice under section 148 is set aside. The court did not articulate any broader precedent beyond its application to the present facts; it emphasized that the decisions relied upon by the revenue were distinguishable because of the change in law applicable to the subsequent assessment year.
Order: Petition allowed.
J.P Devadhar, J.:— Rule. Rule, Returnable forthwith. By consent of the parties, the Writ Petition is taken up for final hearing.
2. In this petition, petitioner has challenged the notice dated 25th May, 2005 issued under section 148 of the Income Tax Act, 1961 (‘the Act’ for short) whereby the assessment for AY 2001-2002 is sought to be reopened. The petitioner has also challenged the order dated 21st November, 2006 passed by the assessing officer rejecting the objections filed by the petitioner for reopening the assessment.
3. The petitioner carries on business of providing verification, inspection and certification of services in India. On 30th October, 2001, the petitioners filed its return of income for AY 2001-2002 declaring the taxable income of Rs. 8,42,67,317/-. Subsequently, the petitioner revised its return to income to Rs. 8,19,03,180/- on account of change in the depreciation claim.
4. The return of income filed by the petitioner was duly processed under section 143(1) of the Act vide intimation dated 24-4-2003. Lateron the return of income was taken up for scrutiny and a detailed questionnaire was issued on 21st October, 2003 calling upon the petitioner to furnish the details of various expenses incurred, the documents evidencing the nature of the expenses under the provisions of the Act. By the said questionnaire, the petitioner was specifically called upon to give details and justification of the payment relating to the technical know-how team and research and development expenses. Accordingly, the petitioner furnished the particulars.
5. By an assessment order dated 11-2-2004 passed under section 143(3) of the Act, the assessing officer disallowed part of the technical know-how team and allowed the deduction of research and development fees as claimed by the petitioner.
6. By the impugned notice dated 25th May, 2005 issued under section 148 of the Act, the assessing officer sought to reopen the assessment for AY 2001-2002 by recording reasons, which read thus:
“1. In your case, an order under section 92CA(3) for the assessment year 2002-2003, was received from the Addl. Commissioner of Income-tax (Transfer Pricing)-2, Mumbai on 23-3-2005, in which the Addl. C.I.T TP-2, has held that R and D Expenditure amounting to Rs. 2.87 crores was paid to SGS Switzerland towards common Research and Development. The benefit of which were stated to be shared by all the Associated concerns global. However, the Addl. C.I.T, TP-2, Mumbai, after detailed investigation held that the transactions entered into by the assessee company with its associate in Switzerland was not Arms' Length and was disallowed. Considering the fact that the similar payment was made under the head “Research and Development” amounting to Rs. 1.47 crores in the relevant assessment year that is 2001-2002, by virtue of the finding of the Addl. C.I.T, TP-2, Mumbai, this payment to SGS Switzerland, would have to be disallowed. Therefore, I have reasons to believe that your company by having claimed wrongful expenses has suppressed total income and thus has evaded tax.
2. In view of the Explanation 2(c)(1) under section 147 of the I.T Act, 1961, I have reason to believe that the income chargeable to tax has escaped assessment for the A.Y 2001-2002 and hence proposed to proceed to tax the said amount.
3. For necessary compliance, a notice under section 143(2)/142(1) is being issued along with this letter. You are requested to furnish the above mentioned details called for in my office at Aayakar Bhavan, Room No. 473, M.K Road, Churchgate, Mumbai-20, within 7 days from the receipt of this letter.”
7. The petitioner filed objections to the reopening of the assessment on 11th September, 2006. It was contended that the assessment order for AY 2001-2002 was passed after detailed enquiry and the reopening of the assessment based on the assessment order for AY 2002-2003 is improper because, the law for AY 2002-2003 was totally different. However, by the impugned order dated 21st November, 2006, the assessing officer rejected the objections raised by the petitioner. Challenging the said notice dated 25th May, 2005 and the order dated 21st November, 2006 rejecting objections, the petitioner has filed present petition.
8. Mr. Pardiwala, learned counsel appearing on behalf of the petitioner submitted that in the present case, there was full disclosure of the material relating to research and development fees and after a detail enquiry, the assessing officer had allowed the said expenses. Therefore, in the absence of any reason to believe that the income has escaped assessment, the impugned notice issued under section 148 of the Act for reopening the assessment for AY 2001-2002 cannot be sustained.
9. Mr. Pardiwala further submitted that from the reasons recorded by the assessing officer, it is seen that the assessment is sought to be reopened solely based on the assessment order passed for the AY 2002-2003 wherein the research and development expenses incurred have been disallowed on the ground that the same were not at Arms Length as contemplated under section 92CA(3) of the Act. Mr. Pardiwala submitted that the special provisions relating to avoidance of tax enacted by Finance Act, 2001 came into force with effect from 1st April, 2002 and were applicable for and from AY 2002-2003. Therefore, reopening of the assessment for AY 2001-2002 based on the assessment order for AY 2002-2003 is wholly unjustified.
10. Relying upon a Full Bench decision of the Delhi High Court in the case of Commissioner Of Income-Tax v. Kelvinator Of India Ltd., 256 ITR 1 and two decisions of this Court in the case of German Remedies Ltd.… v. Dy. Commissioner Of Income-Tax…., 2006 (1) Mh. L.J 517 : 285 ITR 26 and CIT v. Smt. Maniben V. Shah, 283 ITR 453, Mr. Pardiwala submitted that mere change of opinion cannot form the basis for reopening a completed assessment. Accordingly, Mr. Pardiwala submitted that none of the jurisdictional conditions being fulfilled, the impugned notice is liable to be quashed and set aside.
11. Mr. Kotangale, learned counsel appearing on behalf of the respondent, on the other hand, submitted that in the present case, the reopening of the assessment is not based on the law which came into force with effect from 1st April, 2002 but is based on the basis of the material gathered from the assessment order for AY 2002-2003.
12. Relying upon the decision of the Delhi High Court in the case of Consolidated Photo Finvest Limited v. ACIT, reported in 151 Taxman 41 (Delhi), decision of the Apex Court in the case of Ess Ess Kay Engineering Co. P. Limited v. CIT, reported in 247 ITR 818 and a decision of the Apex Court in the case of CIT v. P.V.S Beedieo Pvt. Ltd., reported in 237 ITR 13, Mr. Kotangale submitted that the action under section 147 is permissible even if the assessing officer gathered his reasons to believe from very same record as had been subject-matter of completed assessment proceedings.
13. We have carefully considered the rival submissions. In the present case from the reasons recorded for reopening the assessment, it is evident that the reasons to believe that the income has escaped assessment are based on the findings recorded in the assessment order for AY 2002-2003. In the assessment order for AY 2002-2003, the research and development expenses incurred by the petitioner in AY 2002-2003 have been disallowed partially on the basis of the findings recorded by the Transfer Pricing Officer to the effect that the transactions were not at arms length as contemplated under the Transfer Pricing Regulations. As rightly contended by Mr. Pardiwala, Transfer Pricing Regulations came into force w.e.f 1st April, 2002 and, thus, the said Regulation was not applicable to the AY 2001-2002. Therefore, reopening of the assessment for AY 2001-2002 based on the provisions which were not applicable for AY 2001-2002 cannot be sustained.
14. The contention of the revenue that the assessing officer has only relied upon the material available from the assessment order for AY 2002-2003 cannot be accepted, because what is held in the assessment order for AY 2002-2003 is that the transactions were not at arms length as per the provisions which are applicable to AY 2002-2003. It is not the case of the assessing officer that the deduction allowed in the assessment order passed under section 143(3) of the Act is contrary to any provisions applicable to AY 2001-2002. Thus, in the facts of the present case, apart from the assessment order for AY 2002-2003, there are no other reasons for reopening the assessment. Admittedly, the expenses in question have been incurred after obtaining FIPB approval and approval from the R.B.I Therefore, reopening of the assessment for AY 2001-2002 on the ground that the transactions are not at arms length is without any merit. The decisions relied upon by the counsel for the revenue are distinguishable on facts, because, in all those cases there were no change in law in the subsequent assessment years and, therefore, reason to believe that income has escaped assessment could be gathered from the subsequent assessment orders. In the present case, the law in the subsequent year being different, reopening of the assessment based on the subsequent assessment order cannot be sustained.
15. In this view of the matter, the reopening of the assessment for AY 2001-2002 on the ground that transactions were not at Arms Length as held in the assessment order for AY 2002-2003 cannot be sustained.
16. Accordingly, the petition succeeds. The impugned notice dated 25th May, 2005 is quashed and set aside. Rule is made absolute in terms of this order with no order as to costs.
Petition allowed.
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