The Hon‟ble Mumbai High Court (“HC”) recently pronounced its judgment in the case of Rabo India Finance Limited (“the taxpayer”), wherein the HC held that reopening of the assessment proceedings based on mere “change of opinion” is not valid. HC also observed that when any material / information is furnished by the taxpayer, it is reasonable to presume that an Assessing Officer (“AO”) has considered all such material before making the assessment order.
Facts
The taxpayer, a non-banking financial institution, is engaged in providing investments, financial and strategic advisory services. The taxpayer entered into various agreements with its Netherland based parent company to avail business support services on a cost sharing basis (“support services”).
During the Assessment Year (“AY”) 2004-05, the taxpayer entered into international transactions of availing support services pursuant to the business support services agreement. The AO referred the case to the Transfer Pricing Officer (“TPO”) under section 92CA of the Income-tax Act, 1961 (“the Act”). During the assessment proceedings for AY 2004-05, the taxpayer submitted various material including the inter-company agreements, nature of services and basis of charge in respect of support services. Based on the submissions and documents furnished by the taxpayer, the TPO accepted arm‟s length price of payment made by taxpayer for availing support services and no adjustment was made by the TPO.
Further, the taxpayer had also made application under section 195(2) of the Act for „nil‟ withholding tax from payment of support service charges contending that payment to parent company does not constitute income and does not attract any income tax in India. After considering the details furnished by the taxpayer i.e. agreements, nature of services, etc. the application was rejected and the taxpayer was directed to deduct tax at the rates specified in the order. However, as the taxpayer failed to deduct tax while making such payment, the AO disallowed part of such payment under section 40(a)(i) of the Act.
The taxpayer entered into identical international transactions in AY 2007-08 as well. During the assessment proceedings for AY 2007-08, the taxpayer was asked to substantiate arm‟s length nature of payment for support services availed and to produce relevant details. Based on the details furnished by the taxpayer, the TPO contended that the details submitted by the taxpayer were not adequate to substantiate receipt of services by taxpayer and the expenditure was not for business expediency. Resultantly, the AO / TPO disallowed payment for availing support services by the taxpayer for AY 2007-08.
Notably, though the facts of the case being the same, stand taken by the TPO in AY 2007-08 was contrary to that of AY 2004-05 wherein payment for support services by taxpayer was accepted to be at arm‟s length.
The AO served notice under section 148 read with section 147 of the Act and re-opened the case for AY 2004-05 on the ground that during the assessment proceedings for AY 2007-08, the exact nature of the payment was not disclosed by the taxpayer and the facts being the same for AY 2004-05, the payment for support services need to be disallowed. The AO also stated that the taxpayer failed to make full and true disclosure of the nature of support services. In the re-assessment order, the arm‟s length price of payment for support services as determined by the taxpayer was not accepted and the same was disallowed by the AO.
Aggrieved by the action of the AO, the taxpayer challenged the re-opening notice as well as the reassessment order passed by the AO and filed write petition before HC.
Observations and Ruling of the HC
HC observed that the material and details relied upon by the AO during AY 2007-08 and AY 2004-05 were same and there is no mention in the order about inadequate disclosure by the taxpayer. Further, that the AO has not specified the nature of inadequate disclosure.
Further, HC also noted that considering facts of the case, it is reasonable to presume that the AO had considered the material filed before him as well as the materials called for by him before making the assessment order. HC also noted that it is reasonable therefore, to presume that the AO had applied his mind to the agreements and matters connected therewith relating to the agreement. Disclosure in various statutory documents such as Income-tax Return, Accountant‟s Report, Annual Accounts, etc. and submission of various material by the taxpayer including those submitted with application under section 195, substantiates that the AO was aware of existence of the transactions as well as details thereof.
HC, therefore held that reopening of assessment in case of the taxpayer is clearly a case of difference of opinion and quashed the notice and order of reassessment issued by the AO.
HC also relied on judgments in the case of NYK Line (India) Limited [Write Petition No.159 of 2012, Bombay HC] and Eicher Ltd [294 ITR 310, Delhi HC].
Conclusion
The decision holds importance in the current era of transfer pricing litigations in India wherein the taxpayers could face adverse audit outcome due to different opinion for different years by tax authorities. The decision emphasizes that in order to re-open the case, specific reference inter-alia to inadequate disclosure by the taxpayer and availability of new
material on record is necessary. The case cannot be re-opened merely due to change of opinion which occurred in assessment proceedings of one year leading to re-opening of assessment in another year.
Source: M/s Rabo India Finance Limited, Mumbai vs. Deputy Commissioner of Income-tax, Writ Petition No. 870 of 2012.
Facts
The taxpayer, a non-banking financial institution, is engaged in providing investments, financial and strategic advisory services. The taxpayer entered into various agreements with its Netherland based parent company to avail business support services on a cost sharing basis (“support services”).
During the Assessment Year (“AY”) 2004-05, the taxpayer entered into international transactions of availing support services pursuant to the business support services agreement. The AO referred the case to the Transfer Pricing Officer (“TPO”) under section 92CA of the Income-tax Act, 1961 (“the Act”). During the assessment proceedings for AY 2004-05, the taxpayer submitted various material including the inter-company agreements, nature of services and basis of charge in respect of support services. Based on the submissions and documents furnished by the taxpayer, the TPO accepted arm‟s length price of payment made by taxpayer for availing support services and no adjustment was made by the TPO.
Further, the taxpayer had also made application under section 195(2) of the Act for „nil‟ withholding tax from payment of support service charges contending that payment to parent company does not constitute income and does not attract any income tax in India. After considering the details furnished by the taxpayer i.e. agreements, nature of services, etc. the application was rejected and the taxpayer was directed to deduct tax at the rates specified in the order. However, as the taxpayer failed to deduct tax while making such payment, the AO disallowed part of such payment under section 40(a)(i) of the Act.
The taxpayer entered into identical international transactions in AY 2007-08 as well. During the assessment proceedings for AY 2007-08, the taxpayer was asked to substantiate arm‟s length nature of payment for support services availed and to produce relevant details. Based on the details furnished by the taxpayer, the TPO contended that the details submitted by the taxpayer were not adequate to substantiate receipt of services by taxpayer and the expenditure was not for business expediency. Resultantly, the AO / TPO disallowed payment for availing support services by the taxpayer for AY 2007-08.
Notably, though the facts of the case being the same, stand taken by the TPO in AY 2007-08 was contrary to that of AY 2004-05 wherein payment for support services by taxpayer was accepted to be at arm‟s length.
The AO served notice under section 148 read with section 147 of the Act and re-opened the case for AY 2004-05 on the ground that during the assessment proceedings for AY 2007-08, the exact nature of the payment was not disclosed by the taxpayer and the facts being the same for AY 2004-05, the payment for support services need to be disallowed. The AO also stated that the taxpayer failed to make full and true disclosure of the nature of support services. In the re-assessment order, the arm‟s length price of payment for support services as determined by the taxpayer was not accepted and the same was disallowed by the AO.
Aggrieved by the action of the AO, the taxpayer challenged the re-opening notice as well as the reassessment order passed by the AO and filed write petition before HC.
Observations and Ruling of the HC
HC observed that the material and details relied upon by the AO during AY 2007-08 and AY 2004-05 were same and there is no mention in the order about inadequate disclosure by the taxpayer. Further, that the AO has not specified the nature of inadequate disclosure.
Further, HC also noted that considering facts of the case, it is reasonable to presume that the AO had considered the material filed before him as well as the materials called for by him before making the assessment order. HC also noted that it is reasonable therefore, to presume that the AO had applied his mind to the agreements and matters connected therewith relating to the agreement. Disclosure in various statutory documents such as Income-tax Return, Accountant‟s Report, Annual Accounts, etc. and submission of various material by the taxpayer including those submitted with application under section 195, substantiates that the AO was aware of existence of the transactions as well as details thereof.
HC, therefore held that reopening of assessment in case of the taxpayer is clearly a case of difference of opinion and quashed the notice and order of reassessment issued by the AO.
HC also relied on judgments in the case of NYK Line (India) Limited [Write Petition No.159 of 2012, Bombay HC] and Eicher Ltd [294 ITR 310, Delhi HC].
Conclusion
The decision holds importance in the current era of transfer pricing litigations in India wherein the taxpayers could face adverse audit outcome due to different opinion for different years by tax authorities. The decision emphasizes that in order to re-open the case, specific reference inter-alia to inadequate disclosure by the taxpayer and availability of new
material on record is necessary. The case cannot be re-opened merely due to change of opinion which occurred in assessment proceedings of one year leading to re-opening of assessment in another year.
Source: M/s Rabo India Finance Limited, Mumbai vs. Deputy Commissioner of Income-tax, Writ Petition No. 870 of 2012.
No comments:
Post a Comment