In the Income-tax Appellate Tribunal, Mumbai Bench in the case of A.M.Tod Company India Pvt. Ltd. vs. The Income-tax Officer in ITA No. 492/ Mum/2006 dated 24th June, 2009 for Assessment Year: 2002-03.
By G Anandhi, Grant Thornton Hyderabad, India
The Hon’ble Mumbai Tribunal in its latest judgement dated June 24, 2009 involving a transfer pricing issue, has passed the order favouring the taxpayer, A.M. Tod Company India Pvt. Ltd., Mumbai (formerly known as Indomint Agriporducts Pvt. Ltd).
The Tribunal in its judgement, has righteously emphasized and upheld the taxpayer’s rights as per Article 265 of the Constitution of India, which had the effect of reversing the mechanical transfer pricing adjustment to total income made by the Revenue basing the auditor’s report.
Assessee’s constitutional rights:
A. The larger question of legal import for adjudication by the Tribunal in this case was:
“ Whether the taxpayer was entitled to request for correct determination of arm’s length price (ALP) when it had itself inadvertently reported a wrong price as the ALP in its TP study report? In other words, can the taxpayer take up a fresh stand different from the original TP study report and revert from the position originally declared”.
The Tribunal decided in the affirmative and in favour of the taxpayer upholding the taxpayers’ rights as per the Constitution of India.
In arriving at its decision, the Tribunal referred to Article 265 of the Constitution of India, relevant judgements by different jurisdictional High Courts on the similar issue, Department’s Circular on the Officers’ duties (favours the assessee); and the Supreme Court’s ruling in CIT vs. Shelly Products & Anr. [(2003) 261 ITR 367 (SC)] on section 240 of the Income-tax Act, 1961. The following paragraphs summarise the points deliberated upon by the Tribunal:
▪ Article 265 of the Constitution of India provides that “ no tax shall be levied or collected except by authority of law”. In a typical case where the assessee has reported a higher sum for taxation to which it is otherwise not taxable or there has been some reporting on behalf of the assessee which erroneoulsly makes it liable for taxation at higher sum than which is rightly due from it. Referring to this situation, the Tribunal held that the purpose of assessment being to determine the correct income and not taking any undue advantage of assessee’s ignorance or mistake or misconception, the ‘principle of estoppel’ will not apply in such a case, and the taxes collected contrary to law have to be refunded.
▪ Various judicial decisions referred by the Tribunal in this regard – Dy. CST vs. Sreeni Printers [(1987) 67 STC 279 (Ker)]; Nirmala L. Mehta vs. A. Balasubramanian CIT & Ors [(2004) 269 ITR 1 (Bom)]; SDS Mongia vs. CBDT [(2007) 211 CTR 357 (Del)]. Also, the recent judgement by Bombay High Court in Set Satellite (Singapore) Pte. Ltd., [(2008) 307 ITR 205 (Bom)], wherein it was held that the assessee cannot be stopped from contending its income not liable to tax merely because the tax on income was paid by him.
▪ The Tribunal dwelt into depths, the judgement favouring the Revenue, CIT vs. Shelly Products’ case by the Hon’ble Supreme Court and very succintly distinguished the decision in the above case with its applicability to the case on hand. In the above referred case, the matter under dispute was, pursuant to the setting aside of the assessment and there being no possibility of framing a fresh assessment, whether the assessee was entitled to refund of the income tax paid by way of advance tax and self assessement tax. The Tribunal and the High Court both answered the reference in the affirmative and in favour of the assessee. The Revenue appealed the matter to the Highest Court of land. The Supreme Court considered the provisions of Section 240 along with Article 265 of the Constitution of India and held that the assessee was entitled to only anmount of tax paid in excess of the liability incurred on the basis of income disclosed by him and not the tax paid by him by way of advance tax and self assessment tax. In other words, the assessee cannot claim refund of tax paid on the basis of amount assessed by the revenue if it is lower than the total income declared by the assessee. The ratio decidendi of this judgement applies to a case where the assessment is not possible and not a claim made during a valid assessment proceeding. The Supreme Court further held that such matters of mistake or inadvertence or ignorance in computation of income by the assessee shall be brought to the notice of the concerned authority in a case when refund is due and payable and the authority concerned on being satisfied shall grant appropriate relief.
· The Tribunal also took in its favour, the Circular No. 14 (XI -35) dated 1.4.1955 which gives direction that the respected Officers of the Department must not take advantage of the ignorance of the assessee as to his rights.
The other matters of dispute with the revenue appealed before the Tribunal were:
Spot market price vs. Forward buying price as ALP
B. In respect of four invoices of sale of peppermint oil to AE, the taxpayer had adopted the ‘forward buying contract price’ of $14.5 per kg and prepared the purchase orders subsequently on the basis of pre-determined price. The Transfer Pricing Officer (TPO) had considered the ALP of the four invoices to be the spot market prices prevailing as on the date of actual sale as reported by the taxpayer’s auditor in its transfer pricing report.
The Tribunal held that in a case where the forward buying contract had been entered into by the buyer and seller under uncontrolled conditions (in this case the ‘forward buying price’ was higher than the spot market prices), the price prevailing on that date shall represent the arm’s length price and not the price(s) at which purchase orders were subsequently made or the shipment date(s).
Opportunity to Assessee prior to amendment of law
C. The taxpayer had not been given sufficient opportunity to be heard by the AO.
The Tribunal clearly made a distinction between the provisions of the Income-tax Act, 1961 as regards ‘reference to TPO’ by the AO. Under the erstwhile provisions, prior to its amendment by Finance Act, 2007 (w.e.f. 1.6.2007), the AO was required to compute the total income of the assessee under the relevant provisions, having regard to the arm’s length price determined by the TPO. This meant that the AO was required to entertain the assessee’s claim or give necessary opportunity to present his submissions or grievances in the arm’s length determination. Since the year under adjudication was assesssment year 2002-03, the Tribnual held that this erstwhile provision shall squarely apply and the AO had erred in not giving the necessary opportunity to the assessee but merely made the addition on the basis of TPO’s order.
The Mumbai Tribunal’s decision very clearly points out the duties of the revnue in preserving and upholding the constitutional right of the taxpayers, viz., admitting the assessee’s claim where there was a mistake or inadvertence on his part in reporting the correct total income; and providing the necessary opportunity to present his case as per law.
It is sad the revenue takes these important taxpayers’ rights very lightly, adding to its burden of cases. As humbly submitted by the taxpayer’s counsel in its defense, the TPO should have pointed out the ignorance of the assessee in asmuch as he was under an obligation to determine the correct ALP.
On a positive note, the author of this article reminisces a transfer pricing case before the Chennai TPO involving a similar issue. There were certain transactions reported in the TP report as ‘related party’ transactions, the sales of which were actually made to ‘third parties’. The pricing in these third party transactions were lower than the arm’s length price determined and the officer rightly issued a ‘show cause’ to the assessee why the arm’s length price cannot be adopted and the differential be adjusted to total income. Based on assessee’s submissions and providing evidence that they were infact third party transactions not requiring an arm’s length determination under transfer pricing, the TPO passed a clean order duly recording the assessee’s submissions!!!