Satyam Venture Engineering Services Pvt. Ltd., Secunderabad V. Dy. CIT, Hyderabad

ITA 1136/HYD/2013

• Counselvise Citation: 113622514 RSA 2013
• Duration Of Justice: 1 year(s) 10 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-07-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 05-02-2015
• Assessment Year: 2003-2004
• Appeal Filed On: 02-08-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: G APARNA RAO
• Assessee Lawyers: V SIVA KUMAR; C S SUBRAMANYAM
• Keywords: Reopening of assessment; Business income; Revision of order; Transfer pricing; International transaction; Tangible material; Difference of opinion; Assessment record; Commercial expediency; Reason to believe; Change of opinion
• Section: 131; 148; 263; 143(3); 37(1); 10B

Judgement Text

ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 1 OF 57 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD A BENCH, HYDERABAD BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER & SMT.ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA NO.492/HYD/2008 & ITA NO.196/HYD/2011 (ASSESSMENT YEAR: 2003-04) M/S. SATYAM VENTURE ENGG. SERVICES PRIVATE LIMITED HYDERABAD PAN: AAFCS 3287 D VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE 3(1) HYDERABAD (APPELLANT) (RESPONDENT) ITA NO.783/HYD/2008 (ASSESSMENT YEAR: 2003-04) ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE 3(1) HYDERABAD VS. M/S. SATYAM VENTURE ENGG. SERVICES PRIVATE LIMITED, HYDERABAD PAN: AAFCS 3287 D (APPELLANT) (RESPONDENT) ITA NO.924/HYD/2008,1136/HYD/2013 & 1137/HYD/2013 (ASSESSMENT YEARS: 2003-04 & 2004-05) M/S. SATYAM VENTURE ENGG. SERVICES PRIVATE LIMITED HYDERABAD PAN: AAFCS 3287 D VS. DY. COMMISSIONER OF INCOME TAX CIRCLE 3(1) HYDERABAD (APPELLANT) (RESPONDENT) ITA NO.1904/HYD/2011 (A.Y 2002-03) M/S. SATYAM VENTURE ENGG. SERVICES PRIVATE LIMITED HYDERABAD PAN: AAFCS 3287 D VS. DY. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE -9, HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI C.S. SUBRAMANYAM & SHRI V. SIVA KUMAR FOR REVENUE : SMT. G. APARNA RAO, DR DATE OF HEARING : 10/04/2015 DATE OF PRONOUNCEMENT : 01 /0 7 /2015 ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 2 OF 57 O R D E R PER SMT. ASHA VIJAYARAGHAVAN, J.M. THESE ARE THE APPEALS PREFERRED BY THE ASSESSEE AN D THE REVENUE AGAINST THE ORDERS OF THE LOWER AUTHORITIES IN HYDERABAD FOR VARIOUS YEARS BEING 2002-03, 2003-04 AND 2004-0 5 IN THE CASE OF SATYAM VENTURE ENGINEERING SERVICES (P) LT D. ITA NO.492/HYD/2008 A.Y 2003-04 THIS APPEAL FILED BY THE ASSESSEE IS AGAINST THE OR DER OF THE CIT-III HYDERABAD, DATED 5.11.2007 U/S 263 OF THE I NCOME TAX ACT, 1961. 2. BRIEFLY STATED, THE LD CIT REVISED THE ASSESSMEN T MADE BY THE AO VIDE HIS ORDER U/S 263 DATED 5.11.2007. ASSE SSEE DEBITED RS.4,25,88,428 TOWARDS SALE COMMISSION. OUT OF THIS RS.2,59,75,156 IS TOWARDS COMMISSION PAYABLE TO VEN TURE GLOBAL ON THE SALES MADE TO M/S SATYAM COMPUTER SERVICES L TD AND ITS AFFILIATES. THE TPO AND THE AO ALLOWED THE ENTIRE C OMMISSION, WHILE PASSING ORDERS U/S 92CA(3) AND 143(3) RESPECT IVELY AS CLAIMED BY THE ASSESSEE. THE SAID COMMISSION PAYABL E/PAID TO M/S. GLOBAL ENGINEERING OF USA (VENTURE GLOBAL) ON SALES MADE TO M/S SATYAM COMPUTER SERVICES LTD (SCSL) AND M/S. SATYAM MANUFACTURING TECHNOLOGIES INC. ETC., WAS ISSUE UND ER CONSIDERATION IN THE REVISION PROCEEDINGS. THE CIT OBSERVED THAT IT WAS EVIDENT THAT VENTURE GLOBAL BEING ONE OF T HE PARENT COMPANIES IN THE BUSINESS OF THE ASSESSEE, WAS PAID 10% COMMISSION ON SALES MADE TO ANOTHER PARENT COMPANY VIZ., SCSL WHICH WAS NOT WARRANTED BECAUSE BOTH THE PARENT COM PANIES ARE ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 3 OF 57 EQUALLY RESPONSIBLE FOR THE DEVELOPMENT OF THE ASSE SSEE. THE CIT WAS OF THE VIEW THAT UNDER THE CIRCUMSTANCES, PAYME NT OF SALES COMMISSION AT 10% ON SALES MADE TO SCSL AND ITS AFF ILIATES WAS NOT REASONABLE AND THEREFORE NOT ALLOWABLE. 3. THE ASSESSMENT ORDER WAS CONSIDERED ERRONEOUS BY THE CIT IN SO FAR AS IT RELATES TO THE ABOVE ISSUE AND AS S UCH PREJUDICIAL TO THE INTEREST OF REVENUE. HE REJECTED THE CONTENT ION OF THE ASSESSEE THAT THE COMMISSION WAS PAYABLE AS PER THE AGREEMENT ENTERED INTO WITH VENTURE GLOBAL STATING THAT SUC H AN AGREEMENT IS NOT THE FINAL DOCUMENT TO DECIDE WHETH ER THE EXPENDITURE IS GENUINE. HE ALSO STATED THAT THE NAT URE OF SERVICES RENDERED BY VENTURE GLOBAL DO NOT FALL UNDER THE HEAD CHARGEABLE SERVICES. 4. THE CIT ALSO REJECTED THE CONTENTION OF THE ASSE SSEE THAT VENTURE GLOBAL IS A SEPARATE LEGAL ENTITY AND REQ UIRES TO BE COMPENSATED FOR SERVICE RENDERED IRRESPECTIVE OF WH ETHER THE SERVICE RECIPIENT IS A AE OR NON-AE. HE STATED THAT IN A CASE WHERE SERVICE IS RENDERED TO A NEW CUSTOMER, LOT OF SERVICE HAS TO BE RENDERED BY WAY OF ADVERTISEMENT, DEMONSTRATION, PROVIDING SAMPLES ETC., WHICH REQUIRES LOT OF MANPOWER, TRAVE LLING AND EXPENDITURE ETC., WHICH IS NOT THE CASE WHEN SERVIC ES RENDERED TO A PARTNER OF THE JOINT VENTURE WHO IS WELL AWARE OF THE PRODUCT. 5. THE CIT JUSTIFIED THE INITIATION OF PROCEEDINGS U/S 263 STATING THAT PRIOR TO AMENDMENT OF SECTION 92CA(4) W.E.F. 1.6.2007, THE TPOS ORDER WAS NOT BINDING ON THE AO AND THUS THE AO WAS EMPOWERED TO ALTER THE TPOS ORDER. THE CIT HELD ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 4 OF 57 THAT SINCE THE AO DID NOT EXERCISE HIS POWER WHILE PASSING ORDER U/S 143(3) OF THE ACT, THE SAID ORDER WAS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE. 6. HAVING HELD THAT THE ORDER PASSED BY THE AO U/S 143(3) WAS CORRECTLY SUBJECTED TO REVISION U/S 263 OF THE ACT, THE CIT HELD IN PARA 14 OF HIS ORDER THAT AS REGARD THE MET HOD UNDER WHICH COMMISSION ON SALES MADE TO SCSL AND ITS AFFI LIATES IS TO BE DISALLOWED, THE MATTER WAS RESTORED TO THE AO FO R VERIFICATION OF RECORD AND APPLYING THE MOST APPROPRIATE METHOD FOR DETERMINING ALP FOLLOWING TPOS ORDER FOR SUBSEQUEN T A.Y VIS., 2004-05 WHERE THE TPO DISALLOWED COMMISSION PAID ON SALES MADE TO SCSL AND ITS AFFILIATES. HE ALSO DIRECTED T HE AO TO INVOKE THE PROVISIONS OF SECTION 92C(3) AND PASS THE ORDER ACCORDINGLY. 7. ON APPEAL AGAINST THE ORDER U/S 263, THE LD COUN SEL FOR THE ASSESSEE SUBMITTED AS FOLLOWS: AS REGARDS THE DIRECTION OF THE CIT, FOR FOLLOWING TPOS ORDER FOR SUBSEQUENT A.Y VIZ., A.Y 2004-05 IT WAS SUBMITTED THAT THE TPO DISALLOWED COMMISSION PAID O N SALES MADE TO SCSL AND ITS AFFILIATES FOR THAT YEAR ON GROUNDS OF COMMERCIAL EXPEDIENCY AND THIS COULD NOT HAVE BEEN ONE OF THE CONSIDERATIONS TO BE APPLIED WHILE APPLYING TP PROVISIONS AND MAKING A TP ADJUSTMENT. IT WAS FU RTHER SUBMITTED THAT THIS PROPOSITION IS WELL SUPPORTED B Y VARIOUS JUDICIAL DECISIONS. IN THIS CONNECTION, REL IANCE WAS PLACED ON THE DECISION OF THE HYDERABAD BENCH OF TH E ITAT IN THE CASE OF SOCIAL MEDIA INDIA LTD (2013) (40 TAXMANN.COM 37) WHEREIN THE ITAT HELD THAT THE TPO COULD ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 5 OF 57 NOT HAVE DISALLOWED DISALLOWED ANY EXPENDITURE ON T HE GROUND THAT IT WAS NOT NECESSARY OR PRUDENT FOR THE ASSESSEE TO HAVE INCURRED THE SAME NOR ON THE REASO N THAT THE ASSESSEE HAS NOT JUSTIFIED THE BENEFIT PRINCIPL E. ITAT TOOK SUPPORT FROM THE DECISION OF THE DELHI HIGH CO URT IN THE CASE OF EKL APPLIANCES (2012) (24 TAXMANN.COM 1 99) (DELHI HIGH COURT). IT WAS ARGUED THAT THE VIEW TAK EN BY THE CIT THAT THE ORDER OF THE AO IS ERRONEOUS AND PREJU DICIAL TO THE INTEREST OF REVENUE FOR THE REASON THAT THE RAT IONALE OF THE ORDER OF TPO FOR A.Y 2004-05 WAS NOT FOLLOWED, CANNOT BE SUSTAINED IN THE LIGHT OF THE LEGAL POSITION SUB MITTED ABOVE. IT WAS FURTHER SUBMITTED THAT THE TPO IN HIS ORDER U/S 92CA(3) OF THE ACT FOR A.Y 2003-04 RECORDED THAT TH E ASSESSEE PRODUCED EVIDENCE BY WAY OF DEBIT NOTES AN D BANK STATEMENT PROVING THE REMITTANCE OF SALES COMMISSIO N AT 10% OF VALUE OF ENGINEERING SERVICES. THE TPO ALSO RECORDED THAT AFTER COMPARING THE SAME WITH LIMITS FIXED UND ER OTHER STATUTORY REGULATIONS VIZ., FERA AND CUSTOMS REGULA TIONS @ 12.5% AND RECORDED THAT THE SAME IS ACCEPTED UNDER CUP METHOD. IN THE LIGHT OF THIS POSITION, THE ACCEPTAN CE OF THE TPOS ORDER BY THE AO CANNOT BE HELD TO BE PREJUDIC IAL TO REVENUE. IN THIS CONNECTION RELIANCE WAS PLACED ON THE DECISION OF ITAT A BENCH HYDERABAD IN ITA NOS.549/H/2014 AND 595/H/2015 DATED 13.10.2014 IN THE CASE OF M/S. OWENS CORNING INDUSTRIES (INDIA) P VT. LTD HYDERABAD WHEREIN IT HAS BEEN HELD THAT ONCE RBI AP PROVAL OF ROYALTY RATE WAS OBTAINED, THE PAYMENT WAS TO BE HELD AS AT ARMS LENGTH. ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 6 OF 57 ASSESSEE, THEREFORE, SUBMITTED THAT EVEN IF THE CIT WAS CORRECT IN HOLDING THAT THE AO HAD POWER U/S 92CA(4 ) OF THE ACT TO INTERFERE WITH THE ORDER OF THE TPO, THE ACQUIESCENCE OF THE AO IN THE ORDER OF THE TPO (OR HIS FAILURE TO EXERCISE THE POWER AVAILABLE TO HIM U/S 92CA(4) DID NOT RESULT IN ERROR OR PREJUDICE TO THE INTERES T OF REVENUE BECAUSE THE REASONING OF THE TPO IN ACCEPTI NG THE SALES COMMISSION AS REASONABLE BY ADOPTING THE CUP METHOD HAS FOUND ACCEPTANCE BY THE APPELLATE AUTHOR ITIES INCLUDING THE JURISDICTIONAL BENCH OF THE ITAT. AGA IN THE METHOD OF COMMERCIAL EXPEDIENCY ADOPTED BY THE TPO FOR A.Y 2004-05 WHICH WAS RECOMMENDED BY THE CIT FOR CONSIDERATION BY THE AO HAS BEEN STRUCK DOWN AS TOT ALLY UNACCEPTABLE BY THE APPELLATE AUTHORITIES INCLUDING THE JURISDICTIONAL BENCH OF ITAT. 8. THE LD DR RELIED ON THE ORDER OF THE AO. 9. WE HAVE HEARD BOTH THE PARTIES. WE ARE OF THE OP INION THAT THE CIT ERRED IN HOLDING THAT IN THE ABSENCE OF SEC TION 92CA(4) DURING THE RELEVANT PERIOD, IT IS NOT BINDING ON TH E AO TO FOLLOW THE ORDER OF TPO. THE ORDER OF CIT IS CONTRARY TO T HE CBDT INSTRUCTION NO.3 OF 2003 WHEREIN IT IS CLARIFIED TH AT THE AO HAS TO COMPUTE THE TOTAL INCOME OF THE ASSESSEE HAVING REG ARD TO THE ARMS LENGTH PRICE SO DETERMINED BY TPO. 10. WE ARE ALSO OF THE VIEW THAT THE CIT OUGHT NOT TO HAVE ASSUMED JURISDICTION U/S 263 OF THE ACT IN AS MUCH AS IT IS MERELY A CHANGE OF OPINION. WE RELY ON THE DECISION OF MALABAR INDUSTRIAL CO LTD. VS. CIT 243 ITR 0083 ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 7 OF 57 EVEN ASSUMING THAT THE ENQUIRIES MADE BY THE ASSESS ING OFFICER ARE INADEQUATE, THE JURISDICTION UNDER SEC. 263 OF INCOME TAX ACT , 1961 CANNOT BE ASSUMED AS IT WAS ONLY IN THE CASES OF LACK OF ENQU IRIES THAT THE JURISDICTION UNDER SEC. 263 OF INCOME TAX ACT , 1961 CAN BE ASSUMED. RELIANCE IN THIS REGARD IS PLACED ON THE FOLLOWING DECISIONS: 1. CIT V. ANIL KUMAR SHARMA - 335 ITR 83 (DELHI); 2. CIT V. SUNBEAM AUTO LTD . 332 ITR 167 (DELHI); 3. CIT V. GABRIEL INDIA LTD . 203 ITR 108 (BOM) IN THE PRESENT CASE BEFORE US THE TPO AND THE ASSES SING OFFICER HAD APPLIED THEIR MIND AND ALLOWED THE ENTIRE COMMI SSION WHILE PASSING ORDERS UNDER SEC. 92CA(3) AND 143(3) RESPEC TIVELY AS CLAIMED BY THE ASSESSEE. HENCE WE ANNUL THE ORDER O F CIT PASSED UNDER SEC.263. 11. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D. ITA NO.196/HYD/2008: A.Y 2003-04 1. THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER PASSED U/S 143(3) R.W.S. 263 OF THE ACT. SINCE IN I TA NO.492/HYD/2008 FOR THE A.Y 2003-04, WE HAVE ANNULE D THE ORDER OF THE CIT PASSED U/S 263, THE APPEAL OF THE ASSESSEE AGAINST THE ORDER PASSED BY THE AO U/S 143(3) R.W.S . 263 OF THE ACT IS TO BE ALLOWED IN FAVOUR OF THE ASSESSEE. 2. IN THE RESULT ASSESSEES APPEAL IS ALLOWED. ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 8 OF 57 ITA NO.783/HYD/2008 (A.Y 2003-04) REVENUES APPEA L & ITA NO.924/HYD/2008: (A.Y. 2003-04) ASSESSEES APPE AL 1. THIS APPEAL IS PREFERRED BY THE REVENUE AGAINST THE ORDER OF THE CIT (A)-III HYDERABAD, DATED 20.02.2008 PASSED FOR A.Y 2003- 04 AND THE MAIN ISSUE INVOLVED IN THE APPEAL IS REG ARDING THE DISALLOWANCE OF RS.92,83,125 MADE BY THE AO ON THE BASIS OF ARMS LENGTH PRICE OF I.T. ENGINEERING SERVICES WOR KED OUT BY THE TPO I.E. ADD. CIT, TRANSFER PRICING, HYDERABAD VIDE HIS ORDER U/S 92CA DATED 16.03.2006 PASSED IN THE CASE OF THE ASS ESSEE. 2. BRIEFLY STATED, THE ASSESSEE HAD PROVIDED CAE SE RVICES TO ITS AES @ $39 PER HOUR, IT HAD CHARGED HIGHER RATES TO UNRELATED ENTERPRISE I.E. M/S GENERAL MOTORS AT ABOUT $56.13 PER HOUR. THE TPO AFTER DUE CONSIDERATION, ADOPTED THE ADJUSTED R ATE REGARDING NON AE AFTER PROVIDING 10% REDUCTION FOR SALES COMM ISSION PAYABLE ON THE SALES MADE TO NON-AES @ $50.52 PER H OUR. THE ASSESSEE EXPLAINED TO THE TPO THAT THE GENERAL MOTO RS (GM) WAS A NEW CUSTOMER DURING THE RELEVANT YEAR AND THE VOL UME OF SERVICES PROVIDED BY THE ASSESSEE TO GM WAS QUITE L ESS, ON ACCOUNT OF WHICH HIGHER RATES WERE CHARGED. HOWEVER , THE TPO OBSERVED THAT THE ASSESSEE ITSELF HAD ASKED FOR ADO PTION OF CUP METHOD AND THERE WAS NO ADJUSTMENT POSSIBLE WHILE A PPLYING THE COMPARISON UNDER CUP METHOD. IN VIEW OF THIS, TPO W ORKED OUT THE DIFFERENCE IN RATE AT $ 11.52 PER HOUR AND THUS COMPUTED THE ARMS LENGTH PRICE OF SERVICES MADE TO AES AT RS.32, 08,47,363 AGAINST THE PRICE SHOWN BY THE ASSESSEE AT RS.31,15 ,64,238, THUS WORKING OUT DIFFERENTIAL AMOUNT OF RS.92,83,12 5 TO BE ADOPTED BY THE AO FOR ADJUSTMENT. ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 9 OF 57 3. AO ADDED THE ABOVE AMOUNT TO THE INCOME RETURNED BY THE ASSESSEE. HOWEVER, WHILE WORKING OUT DEDUCTION U/S 10A, THE AO HAS ALSO INCLUDED THE ABOVE ADDITIONS IN THE BUSINE SS PROFITS ON ACCOUNT OF WHICH THE INCOME HAS BEEN FINALLY ASSESS ED AT RS.43,17,240. 4. AGGRIEVED, ASSESSEE PREFERRED APPEAL BEFORE THE CIT (A). 5. IN GROUND NO.2, ASSESSEE DISPUTED THE AOS FINDI NG THAT ON SITE SERVICES BILLED TO VENTURE USA AND VENTURE GER MANY WERE NOT AT ARMS LENGTH. GROUND NOS. 3 TO 5 AND GROUND NO.7 ARE AGAIN EXTENSION AND ELABORATION OF THE MAIN GROUND TAKEN BY THE ASSESSEE AGAINST THE ADJUSTMENT MADE BY THE TPO/AO BY COMPARISON OF PRICES OF SERVICES RENDERED TO AES WI TH THE PRICES CHARGED TO GENERAL MOTORS (NON-AE). 6. BEFORE THE CIT (A), THE LD AR OF THE ASSESSEE SU BMITTED AS FOLLOWS: 6.1 MAIN EMPHASIS OF THE APPELLANT IN THESE GROUNDS IS THAT GENERAL MOTORS WAS A NEW CUSTOMER DURING THE F.Y. 2002-03 AND THE INITIAL SERVICES WE RE PROVIDED ON A HIGHER RATE ON TRIAL BASIS. (I) THE RATES BETWEEN VENTURE USA/GERMANY AND GENERAL MOTORS SHOULD NOT BE COMPARED WITHOUT MAKING SUITABLE ADJUSTMENTS TOWARDS THE VOLUME OF BUSINESS, AS THE WORKING HOURS PROVIDED TO A.E IS 40 TIMES MORE THAN THE HOURS BILLED TO NON AE (M/S. GENERAL MOTORS). THEREFORE, SUITABLE ADJUSTMENT SHOULD BE MADE IN THE HOURLY RATES TO GIVE EFFECT T O THE VOLUME OF BUSINESS GENERATED. ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 10 OF 57 (II) THE PROVISION SIMILAR TO THAT OF TRANSFER PRIC ING REGULATIONS EXIST IN THE CUSTOMS REGULATIONS OF INDIA ALSO TO DETERMINE THE ARM/S LENGTH PRICE OF THE GOODS IMPORTED INTO INDIA. THE COURTS ON SIMILA R DISPUTES ON COMPARABILITY OF PRICES UNDER CUSTOMS LAW HAVE HELD THAT THE PRICES COMPARED SHOULD TAKE INTO ACCOUNT THE VOLUME DIFFERENCES BETWEEN TWO TRANSACTIONS. (III) BECAUSE THERE EXIST DIFFERENCES W.R.T. VOLUME AND THE NO. OF HOURS WORKED BY THE APPELLANT FOR IT'S AES AND NON AES:. THE TPO OUGHT TO HAVE FOLLOWED THE CONDITIONS PROVIDED IN RULE 10B (2) AND (3) OF THE RULES BEFORE RESORTING TO COMPARISON OF THE PRICES, AND CONSIDERED VOLUME ADJUSTMENT BEFORE DETERMINING THE ARM'S LENGTH NATURE OF THE TRANSACTION OF RENDERING IT ENGINEERING SERVICES TO THE APPELLANT'S AE'S, NAMELY VENTURE USA AND VENTURE GERMANY. 7. THE LD CIT (A) HELD AS FOLLOWS: 6.2 ON CAREFUL CONSIDERATION OF THE SUBMISSIONS O F THE APPELLANT, I FIND THAT THERE IS SOME FORCE IN THE A RGUMENT OF APPELLANT THAT THE AO SHOULD HAVE MADE SUITABLE ADJUSTMENTS BEFORE MAKING THE COMPARISON OF RATES CHARGED BY THE APPELLANT FOR SIMILAR SERVICES TO IT S AES AND NON AES, LOOKING TO THE DIFFERENCE IN VOLUME OF TRANSACTIONS AND THE FACT OF GENERAL MOTORS BEING A NEW CLIENT FOR THE APPELLANT IN F.Y. 2002-03. HOWEVER, I AM NOT IN AGREEMENT WITH THE CONTENTION OF THE APPELLA NT THAT THE RATES CHARGED TO M/S. GENERAL MOTORS CANNOT BE CONSIDERED AS COMPARABLE. ON A PERUSAL OF THE DOCUMENTS AND DETAILS MADE AVAILABLE, I NOTE THAT E VEN THOUGH THERE WAS A DIFFERENCE IN THE VOLUME OF TRANSACTIONS BETWEEN THE AES AND NON-AES, THE NATUR E OF SERVICES (CAE) PROVIDED BY THE APPELLANT REMAINED SIMILAR AND, THEREFORE, THE RATES CHARGED IN RESPEC T OF GENERAL MOTORS WERE CORRECTLY CONSIDERED AS INTERNA L CUP BY THE TPO FOR THE PURPOSE OF COMPARISON IN THIS CA SE. IN VIEW OF THIS, LOOKING TO THE FUNCTIONAL SIMILARITY, I UPHOLD THE ADOPTION OF SERVICES GIVEN TO M/S. GENERAL MOTO RS AS ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 11 OF 57 COMPARABLE WITH THE SERVICES PROVIDED TO THE AES BY THE TPO/AO, ON THE FACTS OF THE CASE. 6.3 THE NEXT IMPORTANT ISSUE REQUIRING CONSIDERAT ION IS THE ADJUSTMENT/DEDUCTION IN RATES REQUIRED TO BE GI VEN ON ACCOUNT OF HIGH DIFFERENCE IN VOLUME OF TRANSACTION S, AS CONTENDED BY THE LD ARS OF THE APPELLANT DURING THE APPEAL PROCEEDINGS. I FEEL THAT, IN VIEW OF THE PRO VISIONS CONTAINED IN RULE 108(1 )(A), RULE 108(2) AS WELL A S RULE 108(3), REASONABLE ADJUSTMENTS SHOULD HAVE BEEN MAD E BY THE TPO/AO TO ELIMINATE THE EFFECTS OF SUCH DIFF ERENCE IN THE VOLUME OF TRANSACTIONS. THERE IS NO DISPUTE ABOUT THE FACT THAT M/S. GENERAL MOTORS WAS A NEW CUSTOME R FOR THE APPELLANT IN F.Y. 2002-03 AND THE TRANSACTI ONS WERE ALSO ON A SMALL SCALE I.E., ONLY 424 HOURS OF SERVICE. HOWEVER, I FEEL THAT EVEN IN SUCH CIRCUMSTANCES, NO ASSESSEE WILL CHARGE A RATE WHICH IS AT GREAT VARIA NCE WITH THE NORMAL MARKET RATE OF THE SERVICES PROVIDE D, CONSIDERING THE FACT THAT IT WAS A NEW CLIENT WITH WHOM THE ASSESSEE WILL TRY TO GET MORE BUSINESS IN FUTUR E. HENCE, DESPITE LOW VOLUME OF TRANSACTIONS, THE RATE S CHARGED BY THE ASSESSEE WOULD NOT BE TOO HIGH IN CA SE OF THE NEW CLIENT. HOWEVER, KEEPING IN VIEW THE SUBSTA NTIAL DIFFERENCE IN THE VOLUME OF TRANSACTIONS WITH M/S. GENERAL MOTORS VIS-A-VIS THE AES OF THE APPELLANT, I FEEL THAT A DEDUCTION OF 5% FROM THE ADJUSTED RATE ADOPT ED BY THE TPO ($50.52) MAY BE ALLOWED WHILE DETERMINING T HE ALP, CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE. THUS, THE APPROPRIATE RATE TO BE ADOPTED FOR COMPAR ISON UNDER CUP METHOD FOR COMPUTATION OF ALP OF THE SERV ICES RENDERED TO AES WOULD BE ($50.52 (-) $ 2.52), OR $ 48 PER HOUR, AGAINST THE RATE CHARGED BY THE APPELLANT AT $ 39 PER HOUR FROM THE AES. 6.4. IN VIEW OF THE ABOVE, THE ADJUSTMENT ON ACCOUNT OF DIFFERENCE IN RATES UNDER THE TP PROVISIONS HAS TO BE WORKED OUT @ $9 PER HOUR. THE TOTAL DIFFERENCE WORKED OUT ON THIS BASIS, ADOPTING THE CONVERSION RATE MENTIONED BY THE TPO AT RS 48.23, WOULD COME TO (16,708 HOURS X 9 X 48.23), OR RS. 72,52,442/-, AGAINST THE DIFFERENCE ADOPTED BY THE ASSESSING OFFICER AT RS. 92,83,125/- IN THE ASSESSMENT ORDER. ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 12 OF 57 THIS DIFFERENCE OF RS. 72,52,440/- WILL BE ADDED TO THE INCOME DISCLOSED BY THE APPELLANT IN PLACE OF T HE ADDITION MADE BY THE ASSESSING OFFICER AT RS. 92,83,125/-. 'THE GROUNDS TAKEN BY THE APPELLANT IN THIS REGARD ARE, ACCORDINGLY, PARTLY ALLOWED. 8. AGGRIEVED, BOTH THE ASSESSEE AND THE DEPARTMENT HAVE COME UP ON APPEAL. 9. THE GROUNDS OF APPEAL IN ITA NO.924/HYD/2008: (A .Y. 2003-04) ASSESSEES APPEAL ARE AS FOLLOWS: 1. THE ORDER OF THE LD CIT (A)-III HYDERABAD DATED 20.02.2008 IS CONTRARY TO THE LAW AND FACTS OF THE CASE. 2. THE LD CIT (A) WHILE PROVIDING DOWNWARD ADJUSTME NT FOR VOLUME OF SALES OUGHT TO HAVE COMPUTED THE ADJUSTMENT ON A SCIENTIFIC BASIS INSTEAD OF ARBITRA RILY ALLOWING 5% ADJUSTMENT. 3. THE LD CIT (A) HAS COMPARED THE PRICES CHARGED TO NON-AE CUSTOMER M/S GENERAL MOTORS FOR 424 HOURS AS AGAINST 16,208 HOURS PROVIDED TO ASSOCIATED ENTERPRISES (VENTURE GROUP) AND ADJUSTMENT OF 5% DOES NOT COMMENSURATE WITH THE DIFFERENCE IN VOLUME OF HOURS WORKED. 4. THE LD CIT (A) OUGHT TO HAVE FOLLOWED THE CONDIT IONS PROVIDED IN RULE 10B(2) AND (3) OF INCOME TAX ACT BEFORE RESORTING COMPARISON OF THE PRICES. 5. THE LD CIT (A) HAS ERRED IN HOLDING THAT THE RAT ES CHARGED TO THE CUSTOMER M/S GENERAL MOTORS AND VENTURE GROUP ARE COMPARABLE. 6. THE LD CIT (A) OUGHT TO HAVE CONSIDERED THE FACT THAT M/S GENERAL MOTORS WAS A NEW CUSTOMER DURING THE FINANCIAL YEAR 2002-03 AND THAT THE INITIAL SERVICE S WERE PROVIDED ON A TRIAL BASIS AT A HIGHER RATE WHE REAS THE WORK FLOW FROM VENTURE GROUP IS IN A CONTINUOUS BASIS OVER A NUMBER OF YEARS. ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 13 OF 57 10. GROUND 1 IS GENERAL IN NATURE. WITH RESPECT TO GROUND NUMBERS 2, 3 4 AND 6 THE LD COUNSEL FOR THE ASSESSE E SUBMITTED THAT THE CIT (A) FAILED TO GRANT NECESSARY ADJUSTME NT FOR THE PRICE DIFFERENCE ON A SCIENTIFIC BASIS AND PROCEEDED ON A N ADHOC BASIS BY GRANTING A DEDUCTION @ 5% WHICH IS NOT IN ACCORD ANCE WITH RULE 10B. THE LD COUNSEL FURTHER SUBMITTED THAT THE ASSESSEE WORKED FOR NEARLY 40 TIMES MORE WITH AE WHEN COMPAR ED TO NON- AE. IT WAS FURTHER SUBMITTED IN ADDITION GENERAL MO TORS IS A NEW CUSTOMER TAKEN ON TRIAL BASIS AND HENCE THE COMPANY HAS QUOTED HIGHER PRICE AS IT WAS NOT SURE WHETHER OR N OT THE CUSTOMER WOULD STAY WITH THE COMPANY. THE LD COUNSE L FOR THE ASSESSEE PRAYS FOR A DOWNWARD ADJUSTMENT OF ATLEAST 25% TO THE PRICE CHARGED TO NON-AE. ALTERNATIVELY THE ASSESSEE PRAYED THAT THE GENERAL MOTORS CANNOT BE CONSIDERED AS VALID CO MPARABLE IN VIEW OF DIFFERENCES IN VOLUME, NEW CUSTOMER RELATIO NSHIP AND FUNCTIONAL DIFFERENCE. 11. ON THE OTHER HAND, THE DEPARTMENT HAS COME ON A PPEAL IN ITA NO.783/HYD/2008 BEFORE US AND FILED THE FOLLOWI NG GROUNDS: 1. THE CIT (A)-III HYDERABAD ERRED IN LAW IN ALLOW ING THE ASSESSEES APPEAL. 2. THE CIT (A) III HYDERABAD OUGHT TO HAVE APPRECIATED THE ACTION OF THE AO IN WORKING OF SERV ICE CHARGES @ $50.52 PER HOUR INSTEAD OF US $ 48 PER HOUR ADOPTED BY THE CIT (A) HYDERABAD. 3. THE CIT (A) OUGHT TO HAVE APPRECIATED THE ACTION OF THE AO THAT HE HAS ADOPTED SERVICE CHARGES @ USD 50.52 PER HOUR AS DETERMINED BY THE TPO. 4. THE CIT (A) OUGHT TO HAVE APPRECIATED THE ACTION OF THE TPO THAT HE HAS DETERMINED THE SERVICE CHARGES AS PER CUP METHOD AS ASKED BY THE ASSESSEE AND IN STRICT PRINCIPLE, THERE IS NO ADJUSTMENT IS POSSIBL E WHILE APPLYING THE PERFECT COMPARISON UNDER CUP METHOD. ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 14 OF 57 12. THE LD DR ARGUED THAT THE CIT (A) OUGHT TO HAVE APPRECIATED THE ACTION OF THE AO WHEREIN SERVICE CH ARGES @ US$ 50.52 PER HOUR WAS ADOPTED AS DETERMINED BY THE TPO . HE ALSO SUBMITTED THAT THE TPO, AS PER CUP METHOD AS REQUES TED BY THE ASSESSEE, NO ADJUSTMENT IS POSSIBLE WHILE APPLYING THE PERFECT COMPARISON AS ADOPTED. 13. THE LD COUNSEL FOR THE ASSESSEE COUNTERED THE S TATEMENT OF THE DR AS BEING THAT WHEN CUP METHOD IS ADOPTED AS AN APPROPRIATE METHOD, NO ADJUSTMENT CAN BE MADE TO TH E PRICE TAKEN AS COMPARABLE. THE LD COUNSEL FOR THE ASSESSE E STATED THAT THIS PROPOSITION IS IN VIOLATION TO RULE 10B(3)(II) WHICH MANDATES THAT THE REASONABLE ACCURATE ADJUSTMENT NEED TO BE MADE TO ELIMINATE EFFECTS OF DIFFERENCE. OTHERWISE, THE NON -AE TRANSACTIONS, AS SUCH, CANNOT BE MADE AS COMPARABLE TO AE TRANSACTIONS. 14. THE LD COUNSEL RELIED ON THE DECISION OF THE MU MBAI BENCH OF THE TRIBUNAL IN THE CASE OF INTERVET INDIA (P) L TD VS. ACIT (39 SOT 93 (MUM.) WHEREIN IT WAS STATED THAT THE CUP ME THOD SHOULD BE APPLIED TO BRING THE PRICES TO A COMPARAB LE LEVEL. 15. WE HEARD BOTH THE PARTIES. WE FIND THAT THE MAI N EMPHASIS OF THE ASSESSEE IS THAT THE GENERAL MOTORS WAS A NE W CUSTOMER DURING FINANCIAL YEAR 2002-03 AND THE INITIAL SERVI CES WERE PROVIDED ON HIGHER RATE, ON A TRIAL BASIS. FURTHER THE RATES BETWEEN VENTURE USA GERMANY AND GENERAL MOTORS SHOU LD NOT BE COMPARED WITHOUT MAKING SUITABLE ADJUSTMENT TOWA RDS THE ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 15 OF 57 VOLUME OF BUSINESS AS THE WORKING HOURS PROVIDED TO AE IS 40 TIMES MORE THAN THE HOURS BILLED TO M/S GENERAL MOT ORS. HOWEVER, WE ARE IN CONFIRMITY WITH THE ORDER OF THE CIT (A) WHEREIN HE HAS APPLIED HIS MIND AND DISCUSSED ELABO RATELY AT PARA NOS. 6.3 AND 6.4. THE CIT (A) HAS JUSTIFIED TH E DEDUCTION OF 5% FROM THE ADJUSTED RATE ADOPTED BY THE TPO WHILE DETERMINING THE ALP BY STATING THAT NO ASSESSEE WILL CHARGE A R ATE WHICH IS AT GREAT VARIANCE WITH THE NORMAL MARKET RATE OF THE S ERVICES PROVIDED CONSIDERING THE FACT THAT IT WAS A NEW CLI ENT WHO WHOM THE ASSESSEE WILL TRY TO GET MORE BUSINESS IN FUTUR E. HENCE THE CIT OBSERVED THAT DESPITE LESS TRANSACTIONS, THE RA TES CHARGED BY THE ASSESSEE IN CASE OF NEW CLIENT. THEREFORE, TH E CIT HAD RIGHTLY DIRECTED FOR AN ADJUSTMENT OF ACCOUNT DIFFE RENCE IN THE RATE UNDER THE TP PROVISIONS WORKED @ US$ 9 PER HOU R. 16. THE GRIEVANCE OF THE ASSESSEE THAT SUITABLE ADJ USTMENT HAVE TO BE MADE TO BRING THE PRICES TO A COMPARABLE LEVEL HAS BEEN SATISFIED BY THE CIT (A) BY GIVING A REDUCTION OF 5%. THE CIT (A) WAS OF THE OPINION THAT THE REDUCTION OF 5% IS SUFFICIENT WITH RESPECT TO THE FACTS OF THE CASE, WE ALSO CONFIRM. 17. THE GROUND OF THE DEPARTMENT IS THAT IN GROUND NO.4, ONCE CUP METHOD IS ADOPTED, NO ADJUSTMENT IS POSSIBLE IS INCORRECT AND THE CIT (A) HAS GIVEN SUFFICIENT ADJUSTMENT OF DEDUCTION AT 5% FROM THE ADJUSTED RATES ADOPTED BY THE TPO ($50. 52 (-) @ 2.52) WHILE DETERMINING THE ALP, CONSIDERED THE FAC TS AND CIRCUMSTANCES OF THE CASE. WE CONFIRM THE ORDER OF THE CIT (A). ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 16 OF 57 18. IN THE RESULT BOTH THE ASSESSEE AND DEPARTMENTA L APPEALS IN ITA NO.924/HYD/2008 AND 783/HYD/2008 ARE DISMISS ED. ITA NO.1136/HYD/2013 A.Y 2003-04 (ASSESSEES APPE AL) 1. THE ORIGINAL ASSESSMENT U/S.143(3) WAS FINALIZE D BY AN ORDER DATED 31.03.2006 BY THE ASSESSING OFFICER BAS ING ON THE ORDER OF THE TRANSFER PRICING OFFICER (TPO). THE AS SESSEE HAD ENTERED INTO VARIOUS INTERNATIONAL TRANSACTIONS (SUCH AS EXPORT OF SOFTWARE ENGINEERING SERVICES, SALES COMM ISSION, MAN POWER RESOURCE SUPPORT, REIMBURSEMENT OF CEO'S REMUNERATION) WITH AE WHICH WERE EXAMINED IN DETAIL BY TPO CULMINATING INTO AN ADDITION TO THE EXPORT SALES BASED ON ARM'S LENGTH COMPUTATION. THE TPO BASED ON THE COMPARABLE UNCONTROLLABLE PRICE (CUP) METHOD FOR DETERMINATION OF THE ARM'S LENGTH PRICE ADOPTED BY THE COMPANY, PROPOSED AN AD JUSTMENT OF RS.93 LAKHS TO THE EXPORT INCOME RECOGNIZED BY THE COMPANY. THE ASSESSMENT WAS COMPLETED BY THE AO MAK ING THE SAID ADDITION TO THE TOTAL INCOME DECLARED BY THE C OMPANY. 2. AGGRIEVED BY THE ASSESSMENT THE ASSESSEE FILED A N APPEAL BEFORE THE CIT(A) WHERE THE RATE PER HOUR FIXED BY THE TPO (FOR DETERMINING ALP UNDER CUP METHOD) WAS REDUCED GIVIN G PARTIAL RELIEF TO THE COMPANY. HOWEVER, DEDUCTION U /S 10A INCORRECTLY ALLOWED ON THE TRANSFER PRICING ADJUSTM ENT IN THE ORIGINAL ASSESSMENT WAS APPROPRIATELY REDUCED BY TH E CIT. CONSEQUENT TO THE CIT(A) ORDER THE NET ENHANCEMENT TO THE INCOME WAS DETERMINED AT RS.57 LAKHS AS AGAINST RS. 93 LAKHS REFERRED ABOVE. AGGRIEVED BY THE SAID ORDER OF CIT( A) THE ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 17 OF 57 REVENUE AND THE COMPANY ARE IN CROSS APPEALS BEFORE THE ITAT WHICH ARE PENDING DISPOSAL. 3. SUBSEQUENTLY THE ASSESSMENT FOR AY 2003-04 WAS R EVISED BY THE CIT U/S.263 OF THE IT ACT. THE CIT FOUND THA T FOR THE AY 2004-05, THE AO DISALLOWED PORTION OF THE SALES COM MISSION PAID BY THE ASSESSEE TO ITS AE. BASED ON THE INFORM ATION, THE CIT DIRECTED THAT THE INTERNATIONAL TRANSACTION WITH RE SPECT TO SALES COMMISSION PAID IS TO BE DISALLOWED, TO THE EXTENT ATTRIBUTABLE TO SERVICE INCOME DERIVED FROM PARENT COMPANY SAT YAM COMPUTER SERVICES LIMITED (SCSL). ACCORDINGLY THE AO BY AN O RDER DATED 31.12.2008 U/S.143(3) R.W.S 263 DISALLOWED AN AMOUN T OF RS.2.59 CRORES OUT OF THE TOTAL SALES COMMISSION PAID OF RS.4.26 CRORES. THE SAID DISALLOWANCE REPRESENTS TH E COMMISSION PAID TO VENTURE GLOBAL ON THE SALES MADE TO SATYAM COMPUTER SERVICES LTD. AND ITS ASSOCIATES. THE ENTI RE SALES COMMISSION PAID ON THE SALES RECEIVED FROM SCSL WAS DISALLOWED. AGAINST THE REVISED ASSESSMENT THE ASSE SSEE FILED APPEAL BEFORE CIT(A). 4. THE CIT (A) DISMISSED THE APPEAL. ASSESSEE FILED APPEAL AGAINST THE CITS ORDER U/S 263 AS WELL AS THE ORDE R OF THE CIT (A) ON THE REVISED ASSESSMENT. THE 263 ORDER WAS ANNULL ED BY OUR ORDER IN ITA NO.492 AND THE APPEAL AGAINST GIVING E FFECT TO ORDER PASSED BY THE AO U/S 143(3) R.W.S. 263 IN ITA NO.19 6/HYD WAS ALSO ALLOWED IN FAVOUR OF THE ASSESSEE. ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 18 OF 57 5. THE AO ISSUED A NOTICE DATED 29.03.2010 U/S.148 REOPENING THE ASSESSMENT AND REQUESTING THE COMPANY TO FILE A RETURN OF INCOME. THE SAID NOTICE WAS RECEIVED BY THE COMPANY ON 31.03.2010. SUBSEQUENT TO THE NOTICE THE COMPANY RE QUESTED THE AO TO CONSIDER THE RETURN OF INCOME FILED ORIGI NALLY ON 28.11.2003 AS RETURN IN RESPONSE TO THE NOTICE U/S.148. THE AO PROVIDED THE REASONS FOR RE-OPENING BY A LETTER DT. 16.09.2010. THE COMPANY OBJECTED TO THE SAID RE-OPENING, BASED ON THE REASONS SO FURNISHED VIDE ITS LETTER DT.27.10.2010. THE AO DISPOSED THE OBJECTIONS TO NOTICE U/S.148 BY A LETTER DT. 1.11.2011. 6. THE AO PROCEEDED TO RE-ASSESS THE INCOME U/S.143(3) R.W.S 147 ACCORDINGLY. THE AO REFERRED THE TRANSACTIONS T O THE TPO FOR ARM'S LENGTH PRICE EVALUATION AND ALSO TO SPECIAL A UDIT U/S.142(2A). NATURE OF ADDITION AMOUNT ALP METHOD ALP (RS.IN BY COMPANY BY TPO TPO ORDER (ADJUSTMENT ON ACCOUNT OF COMMISSION PAID TO AE NET OF DISALLOWANCE IN ORIGINAL 143(3) AND 263 (RS.4.26 - RS.2.60) EXPORT SALES (RS.8.62 - 1.66 CUP CUP 7.90 CUP TNMM AO ORDER SEC.10A ADJUSTMENT TO EXPORT SALES UNDER EXPLANATION 2(IV) UNDER SECTION 1OA 0.89 TOTAL 10.45 ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 19 OF 57 7. BASED ON THE SPECIAL AUDITORS REPORT AND TRANSF ER PRICING OFFICERS ORDER, THE AO MADE A DRAFT ASSESSMENT ORD ER BY PROPOSING THE ABOVE ADDITIONS WHICH ARE IN DISPUTE IN THIS APPEAL. 8. OBJECTIONS TO DISPUTE RESOLUTION PANEL WERE RAIS ED BY THE ASSESSEE. 9. AGGRIEVED BY THE PROPOSED DRAFT ASSESSMENT, THE COMPANY FILED BEFORE THE DRP BY RAISING IN SUMMARY THE FOLL OWING GROUNDS: 1. SEC.L47 - THE REOPENING OF ASSESSMENT U/S.147 AFTER COMPLETING THE ASSESSMENT U/S.L43(3) AND U/S.L43(3) R.W.S 263 DOES NOT SATISFY THE CONDITIONS LAID DOWN U/S. 147. 2. THE COMPARABLES ADOPTED FOR DETERMINING THE ALP OF EXPORT SALES IS INCORRECT DUE TO THE FUNCTIONAL DIFFERENCES BETWEEN THE COMPANY AND COMPARABLES. 3. METHOD ADOPTED FOR DETERMINING THE ALP FOR EXPORT SALES BY THE TPO (TNMM) IS INCORRECT. 4. ALP BY THE TPO FOR THE COMMISSION PAYMENT WITHOUT DETERMINING AND IDENTIFYING THE COMPARABLES UNDER CUP METHOD IS INCORRECT. 5. ADJUSTMENT TO EXPORT SALES TO COMPUTE DEDUCTION U/S 10A IS INCORRECT IN THE LIGHT OF THE SETTLED POSITION OF THE LAW. 10. THE DRP HAD NOT APPRECIATED THE REASONING PUT F ORWARD ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 20 OF 57 BY THE COMPANY IN SUPPORT OF THE ABOVE SAID GROUNDS AND CONFIRMED THE DRAFT ASSESSMENT ORDER OF THE AO. 11. THE DRAFT ASSESSMENT ORDER UPON CONFIRMATION BY THE DRP CULMINATED INTO FINAL ASSESSMENT ORDER WITH THE ADJ USTMENTS TO THE RETURNED INCOME AS EXPLAINED ABOVE. 12. GROUND NOS.2 & 3 BEFORE US IS WHETHER REOPENING U/S 147 IS VALID OR NOT. THE VALIDITY OR OTHERWISE OF THE R EOPENING OF THE ASSESSMENT IS BEING OBJECTED BROADLY ON TWO GROUNDS : I) THE REASON FOR REOPENING IS VAGUE AND BASED ON ABSE NCE OF ANY NEXUS TO ANY OF THE OPERATIONS OF THE ASSESSEE. II) THE ASSESSMENT IS FINALIZED WITHOUT RESULTING IN AN Y ADDITION ON ACCOUNT OF REASON FOR REOPENING. 13. THE AO REOPENED THE ASSESSMENT UNDER SECTION 14 7 BEYOND THE PERIOD OF FOUR YEARS. SEC.147 PERMITS THE REOPE NING /REASSESSMENT OF ASSESSMENT FINALIZED UNDER SECTION 143(3) UPON SATISFACTION OF THE AO THAT THE ASSESSEE HAD F AILED TO DISCLOSE FULLY AND TRULY ALL MATERIAL FACTS NECESSA RY FOR ASSESSMENT FOR THAT ASSESSMENT YEAR. THE REASONS GI VEN BY THE AO TO REOPEN ASSESSMENT IN THE CASE OF THE COMPANY WOULD PROVIDE A LIGHT ON HIS REASONING TO CONCLUDE FAILUR E TO DISCLOSE FULLY AND TRULY ALL MATERIAL FACTS NECESSARY FOR AS SESSMENT. 14. ON 7.1.2009, CHAIRMAN, SATYAM COMPUTER SERVICES LTD HAD WRITTEN A LETTER TO THE BOARD OF DIRECTORS OF S ATYAM ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 21 OF 57 COMPUTERS WHEREIN HE ELABORATELY EXPLAINED VARIOUS TRANSACTIONS OF SATYAM COMPUTER SERVICES LTD WHICH RESULTED IN THE FINANCIAL STATEMENTS BEING INCORRECT. IN HIS ST ATEMENT HE CATEGORICALLY STATED THAT THESE KIND OF IRREGULARIT IES WERE LIMITED TO SATYAM COMPUTERS ALONE AND ONE OF THE OPERATIONS OF THE SUBSIDIARIES HAVE BEEN AFFECTED. IN THE LIGHT OF TH E SAID LETTER WRITTEN BY MR. RAMALINGARAJU AND HIS SUBSEQUENT STA TEMENT BEFORE THE DEPARTMENT, AO PROPOSED TO REOPEN THE AS SESSMENT U/S 147. PARA 4 OF THE REASONS CITED BY THE AO EXPL AINS VARIOUS FACTS DERIVED FROM THE STATEMENT OF MR. RAMALINGARA JU WHICH ACCORDING TO HIM HAD A BEARING OF THE ASSESSMENT OF THE COMPANY. 15. THE SUBMISSIONS OF THE LD COUNSEL FOR ASSESSEE IS REPRODUCED HEREUNDER: THE FOLLOWING ARE THE THREE MAJOR REASONS COMING OU T OF THE REASONS RECORDED BY THE AO TO REOPEN THE ASSESSMENT U/S 147. THE FACTS RELATING TO THESE REASONS FROM THE ASSESS MENT RECORD PRESENT THE VALIDITY OR OTHERWISE OF THE REASONS. REASON - I THE ASSESSEE COMPANY IS ONE OF THE GROUP COMPANIES OF SATYAM COMPUTERS. THE MONEY ORIGINATED FROM THE FAM ILY MEMBERS HAD BEEN TRANSFERRED IN CIRCUITOUS AND COMP LEX MANNER THROUGH FRONT COMPANIES INTO INVESTMENTS AND IN CREATION OF ASSETS IN THE SHAPE OF LARGE TRACTS OF LANDS. THE LD COUNSELS ARGUMENTS ARE AS FOLLOWS: THE ORIGINAL ASSESSMENT WAS COMPLETED U/S.143(3) BY INCORPORATING ADJUSTMENTS TO THE INTERNATIONAL ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 22 OF 57 TRANSACTIONS AS PER THE TPO'S ORDER. THE ASSESSEE C OMPANY HAD NEITHER ACQUIRED NOR SOLD ANY LAND SINCE ITS IN CEPTION. ALL THE TRANSACTIONS WITH THE PARENT COMPANY SCSL A RE EXAMINED IN THE PROCESS OF ORIGINAL ASSESSMENT. THE TRANSFER PRICING OFFICER AND THE ASSESSING OFFICER OBTAINED THE NECESSARY INFORMATION DURING THE COURSE OF ORIG INAL 143 (3) PROCEEDINGS AND AFTER DUE VERIFICATION THE SAID ASSESSMENTS WERE COMPLETED. PARAGRAPH 2 OF TPO' S O RDER (PAGE 26 OF PAPER BOOK) IS EXTRACTED BELOW: 'A NOTICE U/S.92CA OF THE INCOME TAX ACT ALONG WITH QUESTIONNAIRE WAS ISSUED TO THE ASSESSEE ON 28. I O. 2005 REQUIRING THE ASSESSEE TO FURNISH CERTAIN INFORMATI ON AND SUBMIT RELEVANT DOCUMENTS. AUTHORIZED REPRESENTATIV ES OF THE COMPANY APPEARED FROM TIME TO TIME AND FURNISH THE REQUIRED DETAILS AND THE CASE DISCUSSED WITH THEM. ' PARAGRAPH 1 OF THE ASSESSMENT ORDER DT.31.03.2006 ....................... ' IN RESPONSE TO THE POSTING NOTICES ISSUED, S VENKATESWARLU AND RATNA PRASOONA AUTHORIZ ED REPRESENTATIVES OF THE COMPANY APPEARED FROM TIME T O TIME AND FURNISHED DETAILS CALLED FOR. AFTER VERIFI CATION OF THE INFORMATION FURNISHED AND AFTER DISCUSSING THE CASE WITH THE ARS OF THE ASSESSEE COMPANY THE ASSESSMENT IS COMPLETED AS ... UNDER ' THE ABOVE EXTRACTS FROM THE RELEVANT ORDERS CONFIRM FURNISHING OF INFORMATION NECESSARY FOR THE COMPLET ION OF THE ASSESSMENT BEFORE THE TPO AND THE ASSESSING OFF ICER WITH RESPECT TO TRANSACTIONS WITH ALL THE GROUP COM PANIES . REASON - II RAISED BY A.O. FOR REOPENING ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 23 OF 57 THE ASSESSMENT OF THE ASSESSEE COMPANY WAS COMPLET ED U/S.143(3) AND THE ASSESSING OFFICER IS NOT AWARE O F THE LIKELY VARIATIONS IN INCOME AND ASSETS AND LIABILITIES OF SCSL AT THE TIME OF ASSESSMENT. THE TRANSACTIONS REVEALED BY MR. RAM ALINGARAJU APPARENTLY WILL HAVE BEARING ON THE AFFAIRS OF THE GROUP COMPANIES AND THEIR CONSEQUENCE INCOME AND ASSETS POSITION IN VIEW OF THE COMPLEX AND CIRCUITOUS NATURE OF TRANSACTIONS. LD. COUNSELS ARGUMENT WITH RESPECT TO SECOND REASO N FOR REOPENING:- THE ALLEGATIONS THAT THE ASSESSMENT NEEDS TO BE REO PENED U/S.147 BASED ON THE STATEMENT OF MR. RAMALINGARAJU , CHAIRMAN, SAT YAM COMPUTERS, HAS NO NEXUS WITH THE FINANCIAL TRANSACTIONS OF THE COMPANY. THE STATEMEN T BY MR.RAMALINGARAJU CONSISTED DETAILS OF CERTAIN TRANS ACTIONS RELATING TO SAT YAM COMPUTERS. THE SAID STATEMENT O F MR.RAMALINGARAJU EXCLUDES THE AFFAIRS OF ANY SUBSID IARY COMPAMES FROM THE SAID IRREGULARITIES POINTED OUT B Y HIM. PLEASE REFER TO PARA 2 OF LETTER BY MR.RAMALINGA RA JU (PAGE 22 OF PAPER BOOK) STATING THAT, ' THE GAP IN THE BALANCE SHEET HAS ARISEN PURELY ON ACCOUNT OF INFLATED PROF ITS OVER A PERIOD OF LAST SEVERAL YEARS (LIMITED ONLY TO SATYA M STANDALONE, BOOKS OF SUBSIDIARIES REFLECTING TRUE PERFORMANCE). THE AO REFERRED TO CIRCUITOUS AND COMPLEX TRANSACTI ONS BY THE FRONT COMPANIES WHICH RESULTED IN CREATION OF L ARGE TRACTS OF LAND TO THE SAID COMPANIES. IT MAY BE APP ROPRIATE TO DISCLOSE AT THIS POINT THAT THE ASSESSEE COMPANY DOES NOT OWN LAND AS ON THE DATE OF FINANCIAL STATEMENT FOR THE CURRENT YEAR AND SUBSEQUENT YEARS AS WELL, AS EVIDE NCED BY ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 24 OF 57 THE FINANCIAL STATEMENTS. IT HAS NOT PURCHASED OR S OLD LAND TILL NOW. IT IS WELL SETTLED LAW THAT AS ON THE DATE OF REOPE NING, THE AO IS NOT REQUIRED TO PROVE WITH EVIDENCE THE ESCAP EMENT OF INCOME. IT IS ADEQUATE IF HE DEMONSTRATES A RELE VANT AND LIVE POSSIBLE CONNECTION TOWARDS ESCAPEMENT OF INCO ME. NONE OF THE MATERIAL NARRATED BY THE AO IN THE REAS ONS GIVEN BY HIM RELATED TO THE ASSESSEE COMPANY OR HAD ANY BEARING ON THE ASSESSMENT. THE ASSESSEE COMPANY IS OBLIGED TO DISCLOSE TRULY AND FULLY ALL THE FACTS T O ENABLE COMPLETION OF ITS ASSESSMENTS. THE ASSESSEE CANNOT BE OBLIGED TO DISCLOSE ANY INFORMATION WITH RESPECT TO GROUP COMPANIES WHICH HAS NO RELEVANCE TO ITS ASSESSMENTS . THE ASSESSEE COMPANY IS NOT AN INVESTMENT COMPANY N OR HAS ACQUIRED ANY LAND AT ANY POINT OF ITS OPERATION S. HENCE, THE REASON ASSUMED BY THE AO DOES NOT ARISE OUT OF THE RESULTS OF ITS OPERATIONS OR FACTS PERTAINING T O ITS OPERATIONS. IT IS VERY RELEVANT TO NOTE THAT THE CO MPANY IS JOINT VENTURE BETWEEN VENTURE GLOBAL LLC (A COMPANY INCORPORATED IN USA) AND SAT YAM COMPUTER SERVICES LTD WITH 50% SHAREHOLDING EACH. IN ACCORDANCE WITH THE UNDERSTANDING WITH THE JOINT VENTURE PARTNER, THE C EO IS TO BE APPOINTED BY VENTURE GLOBAL ENGINEERING LLC. THE COMPOSITION OF THE BOARD CONSISTED OF THREE DIRECTO RS EACH NOMINATED BY BOTH THE PARTNERS. THE ORGANIZATIONAL STRUCTURE AND THE NATURE OF OPERATIONS DO NOT IN AN Y WAY HAVE REMOTEST POSSIBLE CONNECTION WITH ANY OF THE INVESTMENT OR FRONT COMPANIES ALLEGED BY THE AO. HE NCE, A ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 25 OF 57 REASON THOUGH NOT NECESSARILY CONCLUSIVE, SHOULD HA VE A MINIMUM RELEVANCE TO THE NATURE OF THE BUSINESS, TRANSACTIONS OF THE ASSESSEE COMPANY AND, FINALLY T HE INCOME OF THE COMPANY. THE REASONS CITED BY THE AO ARE FARFETCHED AND FAIL TO BRING OUT AT LEAST A FEEBLE OR THIN LINK WITH THE OPERATIONS OF THE COMPANY. REASON III FOR REOPENING AS NOTED BY ASSESSING OFFI CER THE BOOKS OF FRONT COMPANIES AND FINANCIAL STATEMEN TS DO NOT REFLECT TRUE AND FAIR STATEMENT OF AFFAIRS A ND THUS IT IS APPARENT SOME OF THE TRANSACTIONS ARE AL SO NOT RECORDED IN THE BOOKS OF FRONT COMPANIES LIKE T HAT OF ASSESSEE COMPANY. THE CLAIM OF EXEMPTION U/S.I0A IN THE CASE OF SATYAM COMPUTER SERVICES LTD WAS FOUND TO BE FALSE BY CBI, SFIO AND THE DEPARTMENT. ARGUMENTS BY THE LD COUNSELS WITH RESPECT TO REASO N III ARE AS FOLLOWS: THE REASONING UNDER THIS IS VAGUE AND GENERAL. IT I S A SURMISE AND GUESS WORK OF THE AO. THE AO HAD NOT PRESENTED ANY EVIDENCE THAT THE FINANCIAL STATEMENT S OF FRONT COMPANIES ARE NOT TRUE OR FAIR. THIS IS A CON CLUSION WITHOUT RATIONAL CONNECTION WITH THE EVIDENCE (STATEMENT OF MR.B.RAMALINGA RAJU) FOR FORMATION BE LIEF. THE CLAIM U/S 10A OF SCSL HAS NO RELEVANCE WITH ASSESSMENT OF SVES. THE ASSESSEE COMPANY OBJECTED TO THE REASONS FOR REOPENING FURNISHED BY THE AO, ON THE SIMILAR LINES EXPLAINED ABOVE. THESE OBJECTIONS WERE REPUDIATED B Y THE AO. THE REASONING GIVEN BY THE AO AND THE ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 26 OF 57 JUSTIFICATION OF THE ASSESSEE ARE PROVIDED HEREUNDE R: IN HIS LETTER, AO MENTIONED: 3. IT IS OBJECTED THAT THE STATEMENT MADE BY SRI B.RAMALINGA RAJU, THE ERSTWHILE CHAIRMAN OF SATYAM COMPUTER SERVICES LTD (YOUR PARENT COMPANY) DOES NOT CONTRIBUTE IN ANY WAY TO SUBSCRIBE TO THE REASO N TO BELIEVE ANY INCOME ESCAPED ASSESSMENT AND THE PROVISIONS OF SEC. 148 R. W.S. 147 OF THE INCOME TAX ACT 1961 CANNOT BE INVOKED. HOWEVER THE ABOVE STATEMENT AND THE EVENTS FOLLOWED THEREAFTER ASSUME S SIGNIFICANCE IN AS MUCH AS THE ERSTWHILE CHAIRMAN O F SCSL ADMITTED THAT THE COMPANY'S BALANCE SHEET AS AT SEPTEMBER, 30, 2008 CARRIED AN INFLATED CASH AND BANK BALANCES, NON-EXISTENT ACCRUED INTEREST, AN UNDERSTATED LIABILITY AND AN OVERSTATED DEBTORS POSITION. AS THE SCSL'S ACCOUNTS/BALANCE SHEET REFERRED BY THE THEN CHAIRMAN, INCLUDES THE FINANCI AL RESULTS OF THE SUBSIDIARIES AND JOINT VENTURES OF S CSL, THE ASSESSING OFFICER HAD REASON TO BELIEVE THAT TH E ABOVE ADMISSION OF FINANCIAL IRREGULARITIES AND THE FINANCIAL SEAM AT SATYAM COMPUTERS, YOUR PARENT COMPANY, HAD RAMIFICATION ON THE FINANCIALS OF YOUR COMPANY AS WELL, AS YOUR COMPANY IS JOINT VENTURE, CONTROLLED AND MANAGED BY THE SAT YAM MANAGEMENT HEADED BY SRI B.RAMALINGA RAJU IN INDIA GIVEN THE FACT THAT THE OTHER JV PARTNER IS LOCATED OUTSIDE INDIA. ON THE ABOVE REASON, GIVEN THE MANAGERIAL AND FINANCIAL NEXUS BETWEEN YOUR COMPANY AND PARENT COMPANY, SCSL, THE ASSESSING OFFICER HAD PRIMA ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 27 OF 57 FACIE REASON TO BELIEVE THAT THE INCOME CHARGEABLE TO TAX HAD ESCAPED ASSESSMENT GIVEN THE VOLUME OF TRANSACTIONS AND THE ITEM-WISE CONFESSION MADE BY THE THEN CHAIRMAN OF SCSL. IN VIEW OF THE ABOVE, YO UR OBJECTION THAT THE STATEMENT OF SRI B.RAMALINGA RAJ U DOES NOT CONTRIBUTE TO SUBSCRIBE TO THE REASON TO BELIEVE THAT INCOME CHARGEABLE TO TAX HAD ESCAPED ASSESSMENT HAS NO MEANING IN IT. ' 16. THE ASSESSING OFFICER COMPLETED THE ASSESSMENT BY MAKING THE FOLLOWING THREE ADJUSTMENTS TO THE RETUR NED INCOME. NATURE OF ADDITION AMOUNT (RS. IN CRORES) TPO ORDER (ADJUSTMENT ON ACCOUNT OF ALP) COMMISSION PAID TO AE NET OF DISALLOWANCE IN ORIGINAL 143(3) AND 263 (RS.4.26 RS.2.60) 1.66 EXPORT SALES: (RS.8.62 RS.0.72) 7.90 AO ORDER SECTION 10A ADJUSTMENT TO EXPORT SALES UNDER EXPLANATION 2(IV) U/S 10A 0.89 TOTAL 10.45 THE LD. COUNSEL SUBMITTED AS FOLLOWS: 17. THE FIRST TWO ADJUSTMENTS ARISE OUT OF THE TRAN SFER PRICING OFFICER HAVING CHANGED HIS OPINION IN RESPECT OF DE TERMINATION OF THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSAC TIONS. NONE OF ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 28 OF 57 THE REASONS CITED BY THE AO FOR REOPENING OF THE AS SESSMENT HAD INDICATED ANY POSSIBLE ESCAPEMENT. THE ESCAPEMENT O F INCOME CONTEMPLATED U/S.147 SHOULD ARISE FROM EITHER NON R ECORDING OF A PARTICULAR STREAM OF INCOME / EXPENDITURE OR SHOR T OR EXCESS RECORDING THEREOF. TRANSFER PRICING ADJUSTMENT ARE DIFFERENCES ARISING ON ACCOUNT OF POSSIBLE CHANGES IN THE ALP D EPENDING UPON THE METHODS ADOPTED. DETERMINATION OF ALP UNDE R TRANSFER PRICING MECHANISM IS A PROCESS OF SCIENTIFIC ESTIMA TION OF AN ARM'S LENGTH COMMERCIAL VALUE. DIFFERENCE IF ANY AR ISING TO THE RETURNED INCOME ON ACCOUNT OF TRANSFER PRICING ASSE SSMENT CANNOT BE CONSIDERED AS ESCAPEMENT OF INCOME CONTEM PLATED ULS.147. HENCE, THESE TWO ADDITIONS DO NOT ARISE FROM THE REASONS FOR THE REOPENING OF THE ASSESSMENT. 18. APART FROM THE ABOVE, ADJUSTMENT TO THE RETUNED INCOME ON IDENTICAL LINES HAD TAKEN PLACE AT THE TIME OF ORIG INAL ASSESSMENT PROCEEDINGS AND SUBSEQUENTLY DURING THE PROCEEDINGS U/S.263. 19. THE ADDITION MADE BY DISALLOWING A PORTION OF T HE DEDUCTION U/S.I0A ARISES ON ACCOUNT OF ADJUSTMENT T O THE EXPORT TURNOVER. THIS ADJUSTMENT TO THE INCOME WAS CARRIED OUT FOR THE FIRST TIME. HOWEVER, THIS ADJUSTMENT IS NOT ONE OF THE REASONS FOR WHICH THE ASSESSMENT WAS REOPENED U/S.147 AS FOR TH E REASONS FURNISHED BY THE AO. FURTHER, THE ADDITION PERTAINE D TO A SETTLED LEGAL POSITION OF LAW WHERE AN ADJUSTMENT TO THE EX PORT TURNOVER SHOULD ALSO' RESULT IN AN ADJUSTMENT TO THE TOTAL T URNOVER. THIS ADDITION HAS NO BEARING TO THE REASON CITED BY THE AO FOR RE- OPENING THE ASSESSMENT. THE REDUCTION IN EXPORT TUR NOVER WAS MADE ON ACCOUNT OF LEGAL INTERPRETATION OF FACTS AV AILABLE IN THE ACCOUNTS ALL ALONG AND IN RESPECT OF WHICH THERE WA S NO FAILURE TO DISCLOSE ON THE PART OF THE ASSESSEE. ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 29 OF 57 20. EXPLANATION 3 TO SEC.147 WAS INTRODUCED BY AN AMENDMENT BY FINANCE (2) ACT. 2009 W.E.F. 1.4.1989. THE INTRODUCTION OF THE EXPLANATION WAS TO OVERCOME TO DECISIONS OF THE PUNJAB AND HARYANA HIGH COURT AND RAJASTHAN HIG H COURT WHICH HELD THAT THE AO AFTER ISSUE OF NOTICE U/S.14 8 HAS TO RESTRICT HIS RE-ASSESSMENT (ADDITION) ONLY TO THE L IMITED EXTENT OF INCOME WHICH MAY HAVE ESCAPED BASED ON THE REASONS FOR WHICH THE NOTICE WAS ISSUED. THIS BARRED THE AO FROM MAKI NG ANY ADDITION OTHER THAN ADDITION ARISING ON ACCOUNT OF REASON FOR REOPENING THE ASSESSMENT. 21. THE FINANCE ACT, 2009 CLARIFIED THAT THE SAID I NTERPRETATION OF THE HON'BLE HIGH COURT WAS NOT THE INTENT OF THE PARLIAMENT. HENCE, AN EXPLANATION 3 WAS INTRODUCED TO SEC.147 W HICH ENABLED THE AO TO CARRY OUT ADDITIONS, WHICH ALSO CAME TO THE NOTICE OF THE AO DURING THE ASSESSMENT PROCEEDINGS U/S.L47, NOTWITHSTANDING SUCH ADDITIONS DO NOT ARISE FROM TH E REASONS FOR REOPENING U/S.147. 22. THE LD COUNSEL FOR THE ASSESSEE RELIED ON THE F OLLOWING JUDICIAL PRECEDENTS: CIT VS. JET AIRWAYS (I) LTD (331 ITR 236) SWARNANDHARA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY (ITA NO.1803/HYD/2012). ACIT, RAIPUR VS. MAJOR DEEPAK MEHTA (24 TAXMANN.COM 147 CHATTISGARH). RANBAXY LABORATORIES LTD VS. CIT (12 TAXMANN.COM 74 DELHI) CIT VS. MOHD. JUNED DADANI (30 TAXMANN.COM I. GUJ.) ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 30 OF 57 23. THE DR RELIED ON THE DECISION IN THE CASE OF M AJINDER SINGH KANG V. CIT & ANR.(2012) 344 ITR 0358 AND ARGUED T HAT REOPENING U/S 147 IS VALID. 24. WE HEARD BOTH THE PARTIES. IN A RECENT CASE THE HYDERABAD BENCH OF THE TRIBUNAL IN THE CASE OF ROHINI BOITECB (P) LTD AND OTHER, ITA NO.1233/HYD/2011 AND OTHER APPEALS JOINT LY DISPOSED VIDE ORDER DATED 31.12.2013, THE ISSUE OF SECTION 147, ESPECIALLY IN LIGHT OF SATYAM SCAM WAS EXAMINED. IN THESE SIXT EEN APPEALS ALSO, ASSESSMENTS WERE REOPENED ON SOLE GROUND THAT THESE COMPANIES ARE SAT YAM'S GROUP COMPANIES AND MR.RAMA LINGA RAJU'S LETTER SUGGESTS THE POSSIBLE EVASION OF TAX. THE HON'BLE TRIBUNAL HELD AS UNDER. (IV) THE REOPENING WAS ON WRONG FOUNDATION OF REASONING OF THE FINANCIAL IMPLICATION BETWEEN THE ASSESSEE-COMP ANY AND M/S SATYAM COMPUTER SERVICES LIMITED, WHICH WAS NO ESTABLISHED IN THE REASSESSMENT TO JUSTIFY R EOPENING. 19. HENCE, THERE BEING NO NEXUS OR LIVE-LINK WITH THE R EASONS RECORDED AND THE ' FORMATION OF BELIEF' TO COME TO A CONCLUSION THAT THERE WAS ESCAPEMENT OF INCOME AND ALSO SINCE THE ASSESSMENT HAS BEEN REOPENED BEYOND THE PERIOD OF 4 YEARS WHEN THERE IS NO FAILURE ON THE PART OF THE ASSESSE E TO FULLY AND TRULY DISCLOSE ALL MATERIAL FACTS IN THE ORIGIN AL ASSESSMENT ITSELF, AND THERE BEING , NO TANGIBLE MATERIAL 'FOR THE REOPENING OF THE ASSESSMENT, THE CIT(A) ERRED I N CONFIRMING THE ORDER OF THE ASSESSING OFFICER. WE, THEREFORE, ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 31 OF 57 HOLD THAT THE REOPENING OF THE JURISDICTION UNDER SECTION 147 IS BAD IN LAW AD IS TO BE QUASHED. 25. APPLYING THE ABOVE TO THE ASSESSMENT OF TH E ASSESSEE THE FOLLOWING FACTS EMERGE. THE AO PROCEEDED TO ASSESS THE INCOME BY ISSUING A NORMAL QUESTIONNAIRE SEEKING INFORMATI ON FROM THE ASSESSEE. HE HAD NOT ISSUED ANY SPECIFIC LETTER SEEKING CLARIFICATION ON ISSUES WHICH PROMPTED HIM TO REOPE N THE ASSESSMENT. HE ISSUED SHOW CAUSE NOTICE WHY THE EXP ORT TURNOVER SHOULD NOT BE REDUCED WITH RESPECT TO THE EXPENDITURE IN FOREIGN CURRENCY. IN THE ENTIRE PROCEEDINGS U/S. 143(3) R.W.S 147, THE AO HAD NOT ASKED ANY QUESTION OR INFORMATI ON CONNECTING WITH THE REASON FOR REOPENING. FINALLY H E COMPLETED THE ASSESSMENT U/S.143 R.W.S 147 BY MAKING THE FOLL OWING ADDITIONS: DISALLOWANCE OF CLAIM U/S.10A ON ACCOUNT OF ADJUSTM ENT TO EXPORT TURNOVER DESPITE THE JUDICIAL RULINGS ARE IN FAVOR OF THE ASSESSEE ADDITION ON ACCOUNT OF ALP - ITES SALES TO AE ADDITION ON ACCOUNT OF ALP - COMMISSION PAID TO AE NONE OF THESE ADDITIONS FIGURE IN THE REASONS FOR R EOPENING. THESE ARE OTHER ADDITIONS WHICH AROSE DURING COURSE OF ASSESSMENT. FROM THE ABOVE TWO IRREFUTABLE CONCLUSIONS EMERGE: THE REASON FOR REOPENING WAS BASED ON VAGUE INFORMATION AND A MERE REASON TO SUSPECT, ONLY. ACCORDINGLY, NEITHER ENQUIRY NOR ADDITION ON ACCOUN T, OF REASON TO REOPEN RESULTED IN THE ASSESSMENT U/ S ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 32 OF 57 143 (3) READ WITH SECTION 147. 26. WE RELY ON THE DECISION OF RANJIT REDDY VS. DY. CIT, HYDERABAD (2013) 144 ITD 361, WHEREIN IT HAS BEEN H ELD AS FOLLOWS: ONE NEEDS TO GIVE A SCHEMATIC INTERPRETATION TO TH E WORDS REASON TO BELIEVE FAILING WHICH, SECTION 14 7 WOULD GIVE ARBITRARY POWER TO AO TO REOPEN ASSESSME NTS ON THE BASIS OF MERE CHANGE OF OPINION, WHICH CANNO T BE PER SE REASON TO REOPEN. THE AO HAS NO POWER TO REVIEW; HE HAS THE POWER TO REASSESS. BUT REASSESSM ENT HAS TO BE TAXED ON FULFILMENT OF CERTAIN PRE-CONDIT IONS AND IF THE CONCEPT OF CHANGE OF OPINION IS REMOVE D, THEN, IN THE GARB OF REOPENING THE ASSESSMENT, REVI EW WOULD TAKE PLACE. ONE MUST TREAT THE CONCEPT OF CHA NGE OF OPINION AS AN INBUILT TEST TO CHECK ABUSE OF POW ER BY THE AO. HENCE, THE AO HAS POWER TO REOPEN, PROVIDED THERE IS TANGIBLE MATERIAL TO COME TO THE CONCLUS ION THAT THERE IS ESCAPEMENT OF INCOME FROM ASSESSMENT. REASONS MUST HAVE A LIVE LINK WITH THE FORMATION OF THE BELIEF. 27. FURTHER, PARA 32 AT PAGE 483 IN THE CASE OF S. RANJIT REDDY (SUPRA), READS AS FOLLOWS: SAME VIEW WAS TAKEN BY THE THIRD MEMBER MUMBAI BENCH IN THE CASE OF TELCO DADAJEE DHACKAJEE LTD VS . DY. CIT (ITA NO.4613/MUM/2005 DATED 12 TH MAY, 2010). FURTHER SAME VIEW WAS TAKEN BY DELHI HIGH COURT IN THE CASE OF CIT VS. ORIENT CRAFTS LTD (201 3) 29 TAXMANN.COM 392 AND ALSO BY GUJARAT HIGH COURT IN THE CAZSE OF INDUCTOTHERM INDIA (P) LTD V. DY. CIT IN SPECIAL CIVIL APPLICATION 858 OF 2006 DATED 6.8.201 2. FURTHER BOMBAY BENCH IN THE CASE OF DELTA AIRLINES INC. VS. ITO (INTERNATIONAL TAXATION) (2013) 33 TAXMANN.COM 192(MUM). 28. HENCE, WE ARE OF THE OPINION THAT ON THE FA CTS AND IN THE CIRCUMSTANCES OF THE CASE, THE AO ERRED IN LAW AND FACTS OF THE CASE IN REOPENING THE ASSESSMENT U/S 147 OF THE I.T . ACT, 1961 ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 33 OF 57 AFTER HAVING ASSESSED AND RE-ASSESSED U/S 143(3) AN D SECTION 263. SINCE WE HAVE DECIDED THE JURISDICTIONAL GROUN DS IN FAVOUR OF THE ASSESSEE, WE ARE NOT ADJUDICATING ON THE OTH ER GROUNDS OF APPEAL RAISED BEFORE US. 29. IN THE RESULT ASSESSEES APPEAL IS ALLOWED. ITA NO.1137/HYD/2013 (A.Y 2004-05) 1. THE ORIGINAL ASSESSMENT U/S.143(3) WAS FINALIZ ED BY AN ORDER DATED 28.12.2006 BY THE ASSESSING OFFICER BASING ON THE ORDER OF THE TRANSFER PRICING OFFICER (TPO). THE ASSESSEE HA D ENTERED INTO VARIOUS INTERNATIONAL TRANSACTIONS (SUCH AS EXPORT OF SOFTWARE ENGINEERING SERVICES, SALES COMMISSION, REIMBURSEME NT OF PROFESSIONAL CHARGES, REIMBURSEMENT OF CEO'S REMUNE RATION) WITH AE WHICH WERE EXAMINED IN DETAIL BY TPO CULMIN ATING INTO AN ADDITION TO THE EXPORT SALES BASED ON ARM'S LENG TH COMPUTATION. THE TPO BASED ON THE COMPARABLE UNCONT ROLLABLE PRICE (CUP) METHOD FOR DETERMINATION OF THE ARM'S L ENGTH PRICE ADOPTED BY THE COMPANY, PROPOSED AN ADJUSTMENT OF R S.0.05 LAKHS TO THE EXPORT INCOME RECOGNIZED BY THE COMPAN Y. IN THIS YEAR FOR THE FIRST TIME THE TPO ALSO MADE AN ADJUST MENT TO THE COMMISSION PAID TO VENTURE GLOBAL LLC OF RS.86 LAKH S. 2. APART FROM THE ADDITION RECOMMENDED BY THE TPO THE AO ALSO ELIMINATED CERTAIN EXPENDITURE INCURRED IN FOR EIGN CURRENCY FOR COMPUTATION OF EXEMPTION U/S.10A. THE EXEMPTION CLAIMED AS PER THE RETURN OF RS.1.9 CRORES HAD BEEN REDUCED TO RS.0.24 CRORES BASED ON THE ADJUSTMENT TO THE EXPORT TURNOV ER. THIS RESULTED IN A NET ADJUSTMENT OF RS.L.66 CRORES ON A CCOUNT OF SEC. ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 34 OF 57 1 OA TO THE RETURNED INCOME. THE ASSESSMENT WAS COM PLETED BY MAKING THE SAID ADDITION TO THE TOTAL INCOME DECLAR ED BY THE COMPANY BY THE AO. 3. AGGRIEVED BY THE ASSESSMENT THE ASSESSEE FILED A N APPEAL BEFORE THE CIT. THE CIT(A) DELETED THE ADDITION OF THE TPO OF RS.0.05 LAKHS AND THE ADJUSTMENT MADE TO THE EXPORT TURNOVER IN FAVOUR OF THE ASSESSEE. HOWEVER, HE CONFIRMED THE A DJUSTMENT MADE BY THE TPO WITH RESPECT TO THE COMMISSION OF R S.86 LAKHS. AGGRIEVED BY THE SAID ORDER BOTH THE REVENUE AND TH E COMPANY ARE IN CROSS APPEALS BEFORE THE HON'BLE ITAT WHICH ARE PENDING DISPOSAL. 4. THIS ASSESSEE IS CURRENTLY IN APPEAL BEFORE THE ITAT. THE FACTS RELATING TO THIS ASSESSMENT ARE GIVEN BELOW: 5. THE AO ISSUED A NOTICE DATED 14.03.2011 U/S.148 REOPENING THE ASSESSMENT AND REQUESTING THE COMPANY TO FILE A RETURN OF INCOME. THE SAID NOTICE WAS RECEIVED BY THE COMPANY ON 21.03.2011. SUBSEQUENT TO THE NOTICE THE COMPANY RE QUESTED THE AO TO CONSIDER THE RETURN OF INCOME FILED ORIGINALL Y ON 31.10.2004 AS RETURN IN RESPONSE TO THE NOTICE U/S. 148. THE AO PROVIDED THE REASONS FOR RE-OPENING. THE COMPANY OB JECTED TO THE SAID RE-OPENING, BASED ON THE REASONS SO FURNISHED VIDE LETTER DATED 29.08.2011. THE AO DISPOSED THE OBJECTIONS TO NOTICE U/S 148 BY A LETTER DATED 10.09.2012. ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 35 OF 57 6. THE AO PROCEEDED TO REASSESS THE INCOME U/S 143 (3) R.W.S. 147 ACCORDINGLY. THE AO REFERRED THE TRANSACTIONS T O THE TPO FOR ARMS LENGTH PRICE EVALUATION AND ALSO TO SPECIAL A UDIT U/S 142(2A). NATURE OF ADDIT ION AMOUNT (RS. IN CRORES) ALP METHOD BY COMPANY ALP METHOD BY TPO TPO ORDER (ADJUSTMENT ON ACCOUNT OF ALP) COMMISSION AND REIMBURSEMENT OF PROFESSIONAL CHARGES PAID TO AE 4.84 EXPORT SALES 2.52 CUP TNMM TOTAL 7.36 AO ORDER SECTION 10A ADJUSTMENT TO EXPORT SALES UNDER EXPLANATION 2(IV) UNDER SECTION 10A 1.64 TOTAL 9.00 7. BASED ON THE SPECIAL AUDITORS REPORT AND TPOS ORDER, AO MADE A DRAFT ASSESSMENT ORDER BY PROPOSING THE ABOV E ADDITIONS WHICH ARE IN DISPUTE IN THIS APPEAL. 8. AGGRIEVED BY THE PROPOSED DRAFT ASSESSMENT THE COMPANY FILED OBJECTION BEFORE THE DRP BY RAISING IN SUMMARY THE FOLLOWING GROUNDS: ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 36 OF 57 1. SECTION 147 THE REOPENING OF ASSESSMENT U/S 14 7 AFTER COMPLETING THE ASSESSMENT U/S 143(3) DOES NOT SATIS FY THE CONDITIONS LAID DOWN U/S 147. 2. THE COMPARABLES ADOPTED FOR DETERMINING THE ALP OF EXPORT SALES IS INCORRECT DUE TO THE FUNCTIONAL DIF FERENCES BETWEEN THE COMPANY AND COMPARABLES. 3. METHOD ADOPTED FOR DETERMINING THE ALP FOR EXPOR T SALES BY THE TPO (TNMM) IS INCORRECT. 4. ALP BY THE TPO FOR THE COMMISSION PAYMENT WITHOU T DETERMINING AND IDENTIFYING THE COMPARABLES UNDER C UP METHOD IS INCORRECT. 5. ADJUSTMENT TO EXPORT SALES TO COMPUTE DEDUCTION U/S.10A IS INCORRECT IN THE LIGHT OF THE SETTLED PO SITION OF THE LAW. 9. THE DRP HAD NOT APPRECIATED THE REASONING PUT FO RWARD BY THE COMPANY IN SUPPORT OF THE ABOVE SAID GROUNDS AND CO NFIRMED THE DRAFT ASSESSMENT ORDER OF THE AO. 10. THE DRAFT ASSESSMENT ORDER UPON CONFIRMATION BY THE DRP CULMINATED INTO FINAL ASSESSMENT ORDER WITH THE ADJ USTMENTS TO THE RETURNED INCOME AS EXPLAINED ABOVE. ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 37 OF 57 11. GROUND NO.2 & 3 BEFORE US IS WHETHER REOPENI NG U/S.147 IS VALID? I.E. THE VALIDITY OR OTHERWISE OF THE REO PENING OF THE ASSESSMENT IS BEING OBJECTED BROADLY ON TWO GROUNDS . I) THE REASON FOR REOPENING IS VAGUE AND BASED ON A BSENCE OF ANY NEXUS TO ANY OF THE OPERATIONS OF THE APPELLANT. II) THE ASSESSMENT IS FINALIZED WITHOUT RESULTING I N ANY ADDITION ON ACCOUNT OF REASON FOR REOPENING. 12. THE ASSESSING OFFICER REOPENED THE ASSESSMENT UNDER SECTION 147 BEYOND THE PERIOD OF FOUR YEARS. SEC.14 7 PERMITS THE REOPENING/REASSESSMENT OF ASSESSMENT FINALIZED UNDE R SECTION 143(3) UPON SATISFACTION OF THE AO THAT THE ASSESSE E HAD FAILED TO DISCLOSE FULLY AND TRULY ALL MATERIAL FACTS NECESSA RY FOR ASSESSMENT FOR THAT ASSESSMENT YEAR. THE REASONS GI VEN BY THE AO TO REOPEN ASSESSMENT IN THE CASE OF THE COMPANY WOULD PROVIDE A LIGHT ON HIS REASONING TO CONCLUDE FAILUR E TO DISCLOSE FULLY AND TRULY ALL MATERIAL FACTS NECESSARY FOR AS SESSMENT. 13. ON 07.01.2009 CHAIRMAN OF THE SATYAM COMPUTER S ERVICES LTD HAD WRITTEN A LETTER TO THE BOARD OF DIRECTORS OF SATYAM COMPUTERS WHEREIN HE ELABORATELY EXPLAINED VARIOUS TRANSACTIONS OF SATYAM COMPUTER SERVICES LTD WHICH RESULTED IN THE FINANCIAL STATEMENTS BEING INCORRECT. IN HIS ST ATEMENT HE CATEGORICALLY STATED THAT THESE KIND OF IRREGULARIT IES WERE LIMITED TO SATYAM COMPUTERS ALONE AND NONE OF THE OPERATION S OF THE ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 38 OF 57 SUBSIDIARIES HAVE BEEN AFFECTED. IN THE LIGHT OF TH E SAID LETTER WRITTEN BY MR.RAMALINGARAJU AND HIS SUBSEQUENT STAT EMENT BEFORE THE DEPARTMENT AO PROPOSED TO REOPEN THE ASS ESSMENT U/S.147. EXPLAINING VARIOUS FACTS DERIVED FROM THE STATEMENT OF MR.RAMALINGARAJU WHICH ACCORDING TO HIM HAD A BEARI NG ON THE ASSESSMENT OF THE COMPANY. 14. THE FOLLOWING ARE THE THREE MAJOR REASONS COMI NG OUT OF THE REASONS RECODED BY THE AO TO REOPEN THE ASSESSMENT U/S.147. THE FACTS RELATING TO THESE REASONS FROM THE ASSESS MENT RECORD PRESENT THE VALIDITY OR OTHERWISE OF THE REASONS. REASONS FOR RE-OPENING THE ASSESSMENT AS GIVEN BY T HE ASSESSING OFFICER. REASON - I 'THE ASSESSEE, MRS. SAT YAM VENTURE ENGINEERING SERVICES P LTD, (PANAAFCS3287D), HAS FILED ITS RETU RN OF INCOME FOR THE ASSESSMENT YEAR'2004-05 ON 3110-2004 DECLARING INCOME OF RS. 1,25,02,860. THE ASSESSMENT UNDER SECTION 143(3) WAS COMPLETED ON 28.12.2006 DETERMINING AN INCOME OF RS. 3,82,09,779, AFTER MAK ING ADJUSTMENT AS SUGGESTED BY THE TPO U/S. 92CA IN RES PECT OF INCOME FROM EXPORT OF ENGINEERING SERVICES AND COMMISSION PAYMENT TO ONE OF THE AE IE., VENTURE GL OBAL (USA). SUBSEQUENTLY ON APPEAL CIT (A) PARTLY ALLOWE D THE APPEAL AND ON COMMISSION PAYMENT THE LEARNED CIT (A ) HELD THAT IT IS NOT AN ALLOWABLE EXPENSE AS IT IS N OT INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS IN TERMS OF SECTION 37(1) OF THE INCOME TA X ACT, IN VIEW OF THE ASSESSEE'S FAILURE TO ESTABLISH THE TRA NSACTION IN QUESTION I.E., THE COMMISSION PAYMENT TO VENTURE GLOBAL ON THE EVIDENCE OF SPECIFIC SERVICES RENDERED BY VE NTURE GLOBAL RESULTING BENEFIT TO THE ASSESSEE. FURTHER ON SEVERAL OCCASIONS, THE ASSESSEE FAILED T O ESTABLISH THE GENUINENESS OF THE PAYMENT OF SALES ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 39 OF 57 COMMISSION TO VENTURE GLOBAL BEFORE THE DEPARTMENT, EVEN NOT PRODUCED THE ORIGINAL AGREEMENTS FOR VERIFICATI ON. NO EVIDENCE WAS PRODUCED TO ASCERTAIN THE NATURE OF SE RVICES RENDERED BY THE PAYEE I.E., THE VENTURE GLOBAL DURI NG THE COURSE OF ASSESSMENT AND OTHER PROCEEDINGS. THUS, T HERE IS NO NECESSITY FOR THE ASSESSEE COMPANY TO MAKE TH E PAYMENT TO VENTURE GLOBAL AND ACCORDINGLY THE ARM'S LENGTH PRICE ON THE COMMISSION PAYMENT IS TO BE NIL AS AGAINST THE PAYMENT CLAIMED BY ASSESSEE OF RS.3,66,00,492 AND ALP DETERMINED BY THE TPO OF RS.2,80,36,178 ON THE FACTS MISLED BY THE ASSESSEE. ' THE LD COUNSEL SUBMITTED AS FOLLOWS: 15. THE REASONS GIVEN BY THE ASSESSING OFFICER STEM S OUT FROM THE ORIGINAL ASSESSMENT ORDER, CIT(A) ORDER AND TPO 'S ORDER. THERE IS NO MENTION OF ANY FRESH FACT, EVIDENCE OR INFORMATION LEADING THE AO TO BELIEVE POSSIBLE ESCAPEMENT OF IN COME. IT IS PRE-CONDITION OF SEC.147 THAT AN ASSESSMENT COMPLET ED U/S.143(3) CANNOT BE REOPENED UNLESS THERE IS A FAI LURE TO DISCLOSE FULLY AND TRULY MATERIAL FACTS NECESSARY F OR ASSESSMENT. A CHANGE OF OPINION ON THE SAME SET OF FACTS WILL N OT PERMIT REOPENING U/S.147. BOTH THE PARAGRAPHS ABOVE UNMIST AKABLY REVEALED THE FRAME OF MIND OF THE AO. HE NARRATED T HE FACTS ALREADY AVAILABLE ON ASSESSMENT RECORD AND CONCLUDE D ALP SHOULD HAVE BEEN AT NIL AND DEMONSTRATED THE CHANGE OF HIS OPINION BY CONCLUDING THE ALP SHOULD HAVE BEEN NIL AS AGAINST RS.2.8 CRORES ADOPTED IN ORIGINAL ASSESSMENT. THIS IS A COPY BOOK REPLICA OF WHAT AN AO SHOULD NOT DO FOR REOPEN ING AN ASSESSMENT U/S 147. HENCE, THERE IS NEITHER REASON NOR A JUSTIFICATION TO REOPEN THE ASSESSMENT BASED ON THE ABOVE PARAGRAPHS. ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 40 OF 57 REASON - II GIVEN BY THE ASSESSING OFFICER IS AS FO LLOWS:- 'GIVEN THE FACT THAT THE ASSESSEE COMPANY BEING A J OINT VENTURE COMPANY PROMOTED BY SATYAM COMPUTER SERVICE S LTD UNDER THE CHAIRMANSHIP OF SHRI. B. RAMALINGA RA JU, WHO HAVING CONFESSED TO THE FACT THAT THE ACCOUNTS OF SCSL WERE FUDGED AND CHARGED WITH SEVERAL OFFENCES BY THE INVESTIGATING AGENCIES IN THE AFTERMATH OF THE 'SAFYAM SCAM' AND ON ASSESSEE COMPANY'S FAILURE TO ESTABLIS H THE GENUINENESS OF THE CLAIM OF COMMISSION PAYMENT WORT H CRORES OF RUPEES, I HAVE REASON TO BELIEVE THAT INC OME CHARGEABLE TO TAX HAS ESCAPE ASSESSMENT, WITHIN THE MEANING OF SECTION 147 READ WITH SECTION 149 OF THE L. T ACT. AND THERE IS FAILURE ON THE PART OF THE ASSESS EE TO DISCLOSE FULLY AND TRULY ALL MATERIAL FACTS NECESSA RY FOR ITS ASSESSMENT FOR A. Y 2004-05. FOR THE ABOVE DETAILED REASONS, IT IS PROPOSED TO ISSUE NOTICE TO THE ASSE SSEE UNDER SECTION 148 OF THE I. T ACT TO RE-OPEN THE ASSESSMENT IN THE ASSESSEE'S CASE FOR THE ASSESSMEN T YEAR 2004-05 FOR BRINGING TO TAX THE INCOME CHARGEA BLE TO TAX WHICH HAS ESCAPED ASSESSMENT. ' THE LD COUNSEL SUBMITTED AS FOLLOWS:- 16. THE ALLEGATIONS THAT THE ASSESSMENT NEEDS TO B E REOPENED U/S.147 BASED ON THE STATEMENT OF MR.RAMALINGARAJU, CHAIRMAN, SATYAM COMPUTERS, HAS NO NEXUS WITH THE F INANCIAL TRANSACTIONS OF THE COMPANY. THE STATEMENT BY MR.RAMALINGARAJU CONSISTED DETAILS OF CERTAIN TRANS ACTIONS RELATING TO SATYAM COMPUTERS. THE SAID STATEMENT OF MR.RAMALINGARAJU EXCLUDES THE AFFAIRS OF ANY SUBSID IARY COMPANIES FROM THE SAID IRREGULARITIES POINTED OUT BY HIM. PLEASE REFER TO PARA 2 OF LETTER BY MR.RAMALINGA RAJU (PAG E 22 OF PAPER BOOK OF AY 2003-04) STATING THAT, ' THE GAP IN THE BALANCE SHEET HAS ARISEN PURELY ON ACCOUNT OF INFLATED PROFITS OV ER A PERIOD OF LAST SEVERAL YEARS (LIMITED ONLY TO SATVAM STANDALO NE, BOOKS OF SUBSIDIARIES REFLECTING TRUE PERFORMANCE) ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 41 OF 57 17. NONE OF THE MATERIAL NARRATED BY THE AO IN THE REASONS GIVEN BY HIM RELATED TO THE ASSESSEE COMPANY OR HAD ANY B EARING ON THE ASSESSMENT. THE ASSESSEE COMPANY IS OBLIGED TO DISCLOSE TRULY AND FULLY ALL THE FACTS TO ENABLE COMPLETION OF ITS ASSESSMENTS. THE ASSESSEE CANNOT BE OBLIGED TO DISC LOSE ANY INFORMATION WITH RESPECT TO GROUP COMPANIES WHICH H AS NO RELEVANCE TO ITS ASSESSMENTS. 18. THE TRANSACTION RELATING TO PAYMENT OF COMMISSI ON WAS EXAMINED BY THE TPO, AO AND CIT(A) IN THE ORIGINAL ASSESSMENT PROCEEDINGS. IN THE ABSENCE OF ADEQUATE DOCUMENTATI ON AS CONSIDERED BY THEM THEY DID DISALLOW A PORTION OF T HE COMMISSION PAID. THE STATEMENT OF THE CHAIRMAN OF S AT YAM COMPUTER SERVICES LTD OR ANY OF THE TRANSACTIONS NA RRATED BY HIM HAVE NOT REFERRED TO THE TRANSACTION OF COMMISS ION. 19. THE REASON ELUCIDATED BY THE AO SHOULD LEAD A R ATIONAL PERSON TO THE BELIEF OF POSSIBLE ESCAPEMENT OF INCO ME. IN OTHER WORDS THE REASON SHOULD DIRECT, AN ENQUIRY AS TO QU ANTIFICATION OF INCOME THAT IS FOUND TO HAVE ESCAPED ASSESSMENT. THE REASON AND THE BELIEF FROM THE ABOVE CITED PARAGRAPH STAND POLES APART WITHOUT A NEXUS. HENCE, THE REASONS CITED BY THE AO TO REOPEN THE ASSESSMENT DO NOT PROVE FAILURE OF DISCLOSURE B Y THE ASSESSEE. ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 42 OF 57 20. FURTHER THERE IS NO FRESH FACT NOR A FINDING W HICH CAN LEAD TO REOPENING OF THE ASSESSMENT U/S.147. THE SUBSTANCE OF THE JOINT VENTURE AGREEMENT UNDERSTANDING BETWEEN THE PARTIES AND CONSIDERATION FOR MAKING THE PAYMENT WERE EXTENSIVE LY PRESENTED TO THE TPO AND AO AT THE TIME OF ORIGINAL ASSESSMEN T. 21. THE ASSESSING OFFICER RELIED ON THE JUDGMENT OF THE SUPREME COURT IN ACIT VS RAJESH JHAVERI STOCK BROKERS PVT L TD. TO EXPLAIN THE MEANING OF REASON TO BELIEVE TO REOPEN THE ASSESSMENT U/S.L47. AS HELD BY THE SUPREME COURT AT THE STAGE OF INITIATION OF PROCEEDINGS THE AO SHOULD HAVE A R EASON TO BELIEVE AND NEED NOT ESTABLISH THE FACTS OF ESCAPEM ENT OF INCOME. THE TEST LAID DOWN BY THE SUPREME COURT IS, WHETHER BASED ON THE INFORMATION BEFORE THE AO ANY REASONABLE PERSON COULD HAVE FORMED AN OPINION TO REOPEN THE ASSESSMENT. HENCE, THE AO SHOULD HAVE DEMONSTRATED BY FEEBLEST OF THE FRESH F ACTS, RELEVANT TO THE ASSESSMENT OF THE ASSESSEE COMPANY TO REOPEN THE ASSESSMENT. GENERAL REMARKS RELATING TO GROUP COMPA NIES AND THE TRANSACTIONS INTERSE CANNOT BE A FRESH FACT WHI CH IS RELEVANT TO THE ASSESSMENT OF THE ASSESSEE. THESE FACTS WERE NOT KNOWN TO THE ASSESSEE AT THE TIME OF ASSESSMENT AS THEY ARE NOT GERMANE TO ANY OF THE TRANSACTIONS OF THE COMPANY. IN THE A BSENCE OF KNOWLEDGE OF SUCH TRANSACTIONS OF THE GROUP COMPANI ES AND BECAUSE OF ABSENCE OF ANY LINK WITH THE SAID TRANSA CTION TO THE COMPANY, THEY ARE NEITHER RELEVANT TO THE ASSESSMEN T OF THE COMPANY NOR REQUIRE DISCLOSURE. ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 43 OF 57 22. THE LD DR RELIED ON THE DECISION IN THE CASE O F MAJINDER SINGH KANG V. CIT & ANR.(2012) 344 ITR 0358 AND AR GUED THAT REOPENING U/S 147 IS VALID. 23. THE LD COUNSEL FOR THE ASSESSEE RELIED ON THE F OLLOWING JUDICIAL PRECEDENTS: CIT VS. JET AIRWAYS (I) LTD (331 ITR 236) SWARNANDHARA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY (ITA NO.1803/HYD/2012). ACIT, RAIPUR VS. MAJOR DEEPAK MEHTA (24 TAXMANN.COM 147 CHATTISGARH). RANBAXY LABORATORIES LTD VS. CIT (12 TAXMANN.COM 74 DELHI) CIT VS. MOHD. JUNED DADANI (30 TAXMANN.COM I. GUJ.) 24. WE HEARD BOTH PARTIES. WE RELY ON THE DECISION OF RANJIT REDDY VS. DY. CIT, HYDERABAD (2013) 144 ITD 361, WH EREIN IT HAS BEEN HELD AS FOLLOWS: ONE NEEDS TO GIVE A SCHEMATIC INTERPRETATION TO TH E WORDS REASON TO BELIEVE FAILING WHICH, SECTION 14 7 WOULD GIVE ARBITRARY POWER TO AO TO REOPEN ASSESSME NTS ON THE BASIS OF MERE CHANGE OF OPINION, WHICH CANNO T BE PER SE REASON TO REOPEN. THE AO HAS NO POWER TO REVIEW; HE HAS THE POWER TO REASSESS. BUT REASSESSM ENT HAS TO BE TAXED ON FULFILMENT OF CERTAIN PRE-CONDIT IONS AND IF THE CONCEPT OF CHANGE OF OPINION IS REMOVE D, THEN, IN THE GARB OF REOPENING THE ASSESSMENT, REVI EW WOULD TAKE PLACE. ONE MUST TREAT THE CONCEPT OF CHA NGE OF OPINION AS AN INBUILT TEST TO CHECK ABUSE OF POW ER BY THE AO. HENCE, THE AO HAS POWER TO REOPEN, PROVIDED THERE IS TANGIBLE MATERIAL TO COME TO THE CONCLUS ION THAT THERE IS ESCAPEMENT OF INCOME FROM ASSESSMENT. ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 44 OF 57 REASONS MUST HAVE A LIVE LINK WITH THE FORMATION OF THE BELIEF. 25. FURTHER, PARA 32 AT PAGE 483 IN THE CASE OF S. RANJIT REDDY (SUPRA), READS AS FOLLOWS: SAME VIEW WAS TAKEN BY THE THIRD MEMBER MUMBAI BENCH IN THE CASE OF TELCO DADAJEE DHACKAJEE LTD VS . DY. CIT (ITA NO.4613/MUM/2005 DATED 12 TH MAY, 2010). FURTHER SAME VIEW WAS TAKEN BY DELHI HIGH COURT IN THE CASE OF CIT VS. ORIENT CRAFTS LTD (201 3) 29 TAXMANN.COM 392 AND ALSO BY GUJARAT HIGH COURT IN THE CAZSE OF INDUCTOTHERM INDIA (P) LTD V. DY. CIT IN SPECIAL CIVIL APPLICATION 858 OF 2006 DATED 6.8.201 2. FURTHER BOMBAY BENCH IN THE CASE OF DELTA AIRLINES INC. VS. ITO (INTERNATIONAL TAXATION) (2013) 33 TAXMANN.COM 192(MUM). 26. WE ARE OF THE OPINION THAT THERE IS NO FRESH FA CT OR TANGIBLE MATERIAL TO COME TO THE CONCLUSION THAT THERE IS E SCAPEMENT OF INCOME FROM ASSESSMENT. THE ENTIRE JOINT VENTURE AG REEMENT UNDERSTANDING BETWEEN THE PARTIES AND CONSIDERATION FOR MAKING THE PAYMENT WAS PUT FORTH BEFORE THE TPO AND THE AO AT THE TIME OF ORIGINAL ASSESSMENT. SINCE REASONS RECORDED ALSO DO NOT HAVE ANY LINK WITH THE FORMATION OF BELIEF. IN THE PRESENT CASE BEFORE US THE STATEMENT OF RAMALINGA RAJU HAS NO CO NNECTION WITH THE SUBSIDIARY OF SATYAM GROUP I.E. SATYAM VEN TURE ENGINEERING SERVICES, HYDERABAD (ASSESSEE HEREIN). 27. HENCE, ORDER U/S 143(3) R.W.S. 147 & 144C(5) OF I.T. ACT, 1961 IS CANCELLED AND APPEAL OF THE ASSESSEE IS ALL OWED. ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 45 OF 57 ITA NO.1904/HYD/2011 (A.Y 2002-03) ASSESSEES APPEA L: 1. ASSESSEE FILED RETURN OF INCOME FOR A.Y 2002-03 ON 31.10.2012 DECLARING A TOTAL INCOME OF RS.24,97,979. THE COMPA NY CLAIMED EXEMPTION U/S 10A TO THE EXTENT OF RS.3,93,35,453. THE SAID RETURN OF INCOME WAS PROCESSED U/S 143(1) ON 6.2.20 03. SUBSEQUENTLY THE ASSESSMENT PROCEEDINGS WERE REOPEN ED ON 26.03.2009 U/S 148. 2. AO REOPENED THE SAID PROCEEDINGS U/S 148 BY REC ORDING REASONS FOR SUCH REOPENING AS REQUIRED U/S 147. THE AO RECORDED THAT MR. S. RAMALINGA RAJU, EX-CHAIRMAN OF SATYAM COMPUTER SERVICES LTD HAS STATED THROUGH A LETTER A DDRESSED TO THE BOARD OF DIRECTORS OF SCSL THAT THE ACCOUNTS OF SCSL WERE FUDGED FOR THE LAST SO MANY YEARS. MR. RAJU GAVE SI MILAR CONFESSION THROUGH A SWORN STATEMENT RECORDED U/S 1 31 OF THE I.T. ACT ON 21.02.2009 BY THE DEPARTMENT. 3. AO FURTHER RECORDED THAT INFORMATION GATHERED R EVEALED THAT THE REVENUES RECORDED AND THE EXPENDITURE DEBITED I N THE CASE OF ASSESSEE ARE MANIPULATED TO EVADE INCOME TAX. ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 46 OF 57 4. ON THE STRENGTH OF THE ABOVE SAID REASONING, AO REOPENED ASSESSMENT ACCORDINGLY. IT IS PERTINENT TO NOTE THA T IN THE STATEMENT REFERRED ABOVE MR. RAMALINGA RAJU STATED THAT ACCOUNTS RELATED TO SCSL ARE NOT CORRECT. HE NOTED IN HIS STATEMENT THAT THE SAID PRACTICES WERE NOT CARRIED OUT WITH REGARD TO ACCOUNTS OF THE SUBSIDIARY COMPANIES OF S CSL. 5. AO REFERRED THE ACCOUNTS OF THE ASSESSEE TO SPE CIAL AUDIT U/S 142(2A) IN THE LIGHT OF THE REASONS RECORDED FOR RE OPENING OF THE ASSESSMENT. THE SPECIAL AUDIT WAS CONSIDERED APPROP RIATE BY THE AO AS THE ASSESSEE COMPANY BEING A JOINT VENTURE OF SCSL AND HAVING TRANSACTIONS WITH SCSL, THE FINANCIAL RESULT S OF THE ASSESSEE COMPANY MAY HAVE BEEN EFFECTED IN VIEW OF ITS TRANSACTIONS WITH SCSL. 6. DURING THE COURSE OF THE ASSESSMENT THE AO HAD ALSO MADE A REFERENCE U/S 92CA OF THE ACT TO THE TPO WITH THE A PPROVAL OF THE CIT (CENTRAL) HYDERABAD FOR DETERMINING THE ARMS L ENGTH PRICE OF ITS INTERNATIONAL TRANSACTION. THE TPO AFTER EXAMIN ING THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE COMPANY WITH AE MADE THE FOLLOWING ADJUSTMENTS: (RS.IN CR ORES) NATURE OF INTERNATIONAL TRANSACTION AMOUNT AS PER FINANCIAL STATEMENTS ARMS LENGTH PRICE ADJUSTMENT EXPORT OF SOFTWARE ENGINEERING SERVICES 1.33 1.5 0.17 SALES COMMISSION 3.35 NIL 3.35 TOTAL ADJUSTMENT 3.52 ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 47 OF 57 7. BASED ON THE ABOVE ADJUSTMENT TO THE INTERNATIO NAL TRANSACTIONS AS RECOMMENDED BY THE TPO, AO FINALIZE D THE ASSESSMENT AFTER CONSIDERING THE SPECIAL AUDIT REPO RT AND TRANSFER PRICING OFFICER ORDER BY MAKING THE FOLLOW ING ADJUSTMENTS: ALP ADJUSTMENT - COMMISSION TO AE - EXPORT OF SOFTWARE SERVICES RE-COMPUTATION OF EXEMPTION- ADJUSTMENT TO EXPORT T URNOVER U/S 10. PARTICULARS AMOUNT (IN RS.) RETURNED INCOME 24,97,979 ADJUSTMENT ALP COMMISSION 3,35,00,000 EXPORT SALES 17,00,000 DISALLOWANCE OF EXEMPTION CLAIMED (RS.3,93,35,453 CLAIMED RS.2,19,96,956 ALLOWED) 1,73,38,497 INCOME AS DETERMINED BY AO 5,50,36,476 8. DURING THE PREVIOUS YEAR, THE ASSESSEE PAID RS.3 .35 CRORES TO VENTURE GLOBAL @ 10% ON THE GROSS SALES. ASSESSEE E XPLAINED TO THE TPO THAT THE COMMISSION WAS PAID TO THE JV PART NER VENTURE GLOBAL ENGINEERING SERVICES LLC THAT THE SAID PAYME NTS WAS MADE FOR CUSTOMER IDENTIFICATION, INTRODUCTION, CUS TOMER RELATIONS MANAGEMENT AND WORK SOLICITATION AND PROC UREMENT. TPO FAILED TO APPRECIATE THE OBJECT OF THE JOINT VE NTURE AND THE BUSINESS SYNERGY BROUGHT INTO THE ASSESSEE COMPANY BY BOTH THE JV PARTNERS. HE CONSIDERED CUP METHOD AS THE MOST A PPROPRIATE METHOD TO DETERMINE THE ALP FOR PAYMENT OF COMMISSI ON. THE ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 48 OF 57 TPO REFUSED TO ACCEPT THAT COMMISSION OF 10% IS CON SIDERED NORMAL PRACTICE AND SHOULD BE CONSIDERED AS APPROPR IATE. THE TPO HAVING ADOPTED CUP METHOD AS THE MOST APPROPRIA TE METHOD FAILED TO BRING OUT COMPARABLE ENTITIES OR C OMPARABLE TRANSACTIONS. HE SIMPLY ADOPTED ARMS LENGTH PRICE AS NIL UNDER THE CUP METHOD. 9. TPO EXAMINED THE TP DOCUMENTATION FILED BY T HE ASSESSEE AND IDENTIFIED CERTAIN SHORT COMINGS AND CONSIDERED IT DEFECTIVE. HE OBSERVED THAT THE ASSESSEE HAD USED MULTIPLE YEA R DATA FOR ARRIVING AT THE ARITHMETIC MEAN OF THE MARGINS OF C OMPARABLE COMPANIES. HE ACCORDINGLY REJECTED THE TP DOCUMENTA TION FILED. AFTER HAVING CARRIED OUT ANALYSIS, HE CONSIDERED TN MM AS THE MOST APPROPRIATE METHOD AND ACCORDINGLY APPLIED THE SAME. THE PLI OF 28.84% DETERMINED ACCORDINGLY WAS APPLIED AS THE PERCENTAGE ON OPERATING COST (OP/OC) TO ASCERTAIN T HE ALP ADJUSTMENT. 10. AO HAD ALSO RECOMPUTED THE EXEMPTION U/S 10A W HILE COMPUTING THE INCOME OF THE ASSESSEE COMPANY. AO HA D CONSIDERED THE FOLLOWING EXPENDITURE INCURRED IN FO REIGN CURRENCY AS NOT ENTITLED TO BE PART OF ELIGIBLE EXPORT TURNO VER FOR EXEMPTION THEREOF: NATURE OF THE ITEM AMOUNT (RS.) TRAVELLING EXPENSES 1,36,94,298 EXPENDITURE INCURRED AT OVERSEAS BRANCH 11,45,16,705 OTHERS 1,34,31,415 TOTAL 14,16,42,418 ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 49 OF 57 11. DRAFT ASSESSMENT ORDER SENT TO THE DEPARTMENT . AGGRIEVED AGAINST THE DRAFT ASSESSMENT ORDER U/S 143(3) R.W.S . 147 AND 144C THE ASSESSEE RAISED OBJECTION BEFORE THE DRP B Y RAISING APPROPRIATE GROUNDS. 12. THE GROUNDS RAISED AGAINST THE REOPENING U/S 1 47 WERE REJECTED BY THE DRP. DRP CONSIDERED WHERE A RETURN IS PROCESSED U/S 143(1) THERE IS NO FINDING GIVEN BY THE AO AND HENCE REOPENING IS JUSTIFIED. DESPITE THE AO OR TPO NOT H AVING IDENTIFIED EITHER BOGUS PAYMENTS OR INFLATED EXPEND ITURE, THE DRP ERRONEOUSLY OBSERVED THAT IT IS A WELL KNOWN FA CT THAT IN THIS GROUP THE EXPENDITURE WAS INFLATED, BOGUS PAYMENTS WERE MADE ETC. FOR THESE REASONS, THEY HELD THE REOPENING U/S 147 AS VALID. 13. ALSO OBJECTED TO ON MERITS AGAINST THE ARMS LENGTH PRICE ADJUSTMENT. 14. BEFORE US, THE ASSESSEE RAISED ADDITIONAL GROUNDS WHICH ARE AS FOLLOWS: (I) ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE, THE LD AO ERRED IN LAW AND FACTS IN REOPENING THE CASE U/S 147 WITHOUT A VALID REASON TO BELIEVE THE INCOME ESCAPE D ASSESSMENT. (II) THE AO ERRED ON FACTS AND LAW IN NOT EXCLUDING THE SIMILAR AMOUNT INCURRED IN FOREIGN CURRENCY AND EXCLUDED FROM EXPORT TURNOVER FROM THE TOTAL TURNOV ER. ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 50 OF 57 15. THE DEPARTMENT RAISED NO OBJECTION FOR ADMISS ION OF THE ADDITIONAL GROUNDS. HENCE, WE ADMIT THE SAME. 16. THE DR RELIED ON THE DECISION IN THE CASE OF MAJINDER SINGH KANG V. CIT & ANR.(2012) 344 ITR 0358 AND ARGUED T HAT REOPENING U/S 147 IS VALID. 17. THE VALIDITY OR OTHERWISE OF THE REOPENING OF THE ASSESSMENT IS BEING OBJECTED BROADLY ON TWO GROUNDS: I) THE REASON FOR REOPENING IS VAGUE AND BASED ON ABSENCE OF ANY NEXUS TO ANY OF THE OPERATIONS OF THE ASSESSEE. II) THE ASSESSMENT IS FINALIZED WITHOUT RESULTING IN ANY ADDITION ON ACCOUNT OF REASON FOR REOPENING. 18. THE LD COUNSEL SUBMITTED THAT AS EXPLAINED ABO VE, THE REOPENING U/S 147 WAS BASED ON THE LETTER ADDRESSED BY MR. RAMALINGA RAJU TO THE BOARD OF DIRECTORS OF SCSL AN D THE SWORN DEPOSITION GIVEN THERETO. AO ALSO RECORDED FURTHER THAT INFORMATION GATHERED REVEALED THAT THE REVENUES RE CORDED AND THE EXPENDITURE DEBITED IN THE CASE OF THE ASSESSEE ARE MANIPULATED TO EVADE INCOME TAX. 19. THE LD COUNSEL FURTHER SUBMITTED THAT THE REAS ONS RECORDED BY THE AO ON THE FILE ARE AS FOLLOWS: I) MR S RAMALINGA RAJU, EX-CHAIRMAN OF SCSL WROTE A LETTER TO THE BOARD OF DIRECTORS OF SCSL ON 7 JAN 2009 CONFES SING THAT ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 51 OF 57 THE BOOKS OF ACCOUNTS OF SCSL WERE NOT REPORTED COR RECTLY. MR RAMALINGA RAJU HAD ALSO STATED IN HIS LETTER THAT T HE SUBSIDIARIES ARE REFLECTING TRUE PERFORMANCE. II) SWORN DEPOSITION RECORDED BY THE DEPARTMENT. REITERATION OF THE FACTS MENTIONED IN THE ABOVE LETTER. III). INFORMATION GATHERED REVEALED THAT THE REVENU ES RECORDED AND THE EXPENDITURE DEBITED IN THE CASE OF THE ASSE SSEE ARE MANIPULATED TO EVADE INCOME TAX. THE LD. COUNSEL SUBMITTED AS FOLLOWS :- 20. THE STATEMENT OF MR. RAMALINGA RAJU PROMPTED T HE AOS ATTENTION TOWARDS SCSL. AO MUST HAVE PRESUMABLY CON SIDERED THAT THE CONTENTS OF THE LETTER AND THE STATEMENT M AY NOT BE ADEQUATE TO REOPEN ASSESSMENT OF THE ASSESSEE. HENC E, PROCEEDED TO THE NEXT STEP AND NOTED THAT HE HAD GA THERED INFORMATION THAT THE INCOME OF THE ASSESSEE COMPANY IS ALSO MANIPULATED. HOWEVER, HE DID NOT DWELL ON THE NATUR E OF THE INFORMATION IN HIS POSSESSION TO ASSESS WHETHER THE SAID INFORMATION GAVE RISE TO A REASON TO BELIEVE. HE AL SO FAILED TO SEEK CLARIFICATION REGARDING THE INFORMATION THAT GATHER ED DURING THE ASSESSMENT GIVING RISE TO HIS REASON TO BELIEVE. TH IS GIVES TO CONCLUSION THAT THE SAID INFORMATION IS EITHER NOT PRESENT OR IT WAS NOT GATHERED AT ALL. FINALLY THE PENULTIMATE T EST OF VALIDITY OF THE REASON TO REOPEN, RESULTING IN ADDITION OR ADJU STMENT TO THE INCOME REASSESSED ALSO FAILS, BECAUSE THERE WAS NEI THER ENQUIRY IN THIS DIRECTION NOR ADDITION IN THE ASSESSMENT CO MPLETED U/S 143(3) R.W.S. 147. ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 52 OF 57 21. THE LD COUNSEL FURTHER STATED EXCEPTING THE STA TEMENT MADE BY ASSESSING OFFICER, THERE WAS NO MATERIAL AVAILAB LE WITH ANY AGENCY WITHIN TWO MONTHS AFTER THE STATEMENT. (THE ASSESSEES CASE IS REOPENED WITHIN 3 MONTHS FROM THE DATE OF C ONFESSION BY MR RAMALINGARAJU.). THE TRIAL OF THE OFFENCES COMMI TTED BY MR RAMANLINGA RAJU, EVEN AFTER FIVE YEARS HAS NOT REAC HED A FINALITY NOR THE CHARGES FILED AGAINST SCSL HAD INDICATED AN Y IRREGULARITIES IN SUBSIDIARIES OF SCSL. IN THE ABOV E CIRCUMSTANCES, WHAT IS STATED IN THE LETTER AND STA TEMENT DO NOT GIVE RISE RATIONAL REASON TO REOPEN THE APPELLANT'S CASE. 22. THE LD. COUNSEL SUBMITTED THE NOTICE UNDER SEC .148 WAS ISSUED BASED ON VAGUE REASONS AND THERE WAS NO TANG IBLE OR DEFINITE INFORMATION WHICH COULD LEAD TO THE FORMAT ION OF BELIEF THAT INCOME CHARGEABLE TO TAX HAS ESCAPED ASSESSMEN T. IN THIS CONNECTION, THE ASSESSEE RELIES ON THE UNDERMENTION ED DECISIONS WHERE NOTICE ISSUED U/S.148 WAS QUASHED FOR VAGUENE SS. I) I.T.O VS ON EXIM (P).LTD (AND VICE VERSA) ITA NO:1116/DEL/LL&112/DEL/11, ITAT 'B' BENCH DELHI II) ADDL.C.I. T VS SHREYAS GRAMIN BANK (2012) 25 TA XMANN.COM 282 (SC) 23 THE LD COUNSEL OF ASSESSEE ALSO SUBMITTED THAT T HE RELEVANT ASSESSMENT YEAR IN THIS CASE IS 2002-03 AND THE NOT ICE U/S.148 WAS ISSUED IN MARCH, 2009 I.E., BEYOND THE PERIOD O F 4 YEARS FROM THE END OF THE ASSESSMENT YEAR. THE CASE FALLS UNDE R SEC.149( 1 )(B), THE PREREQUISITE FOR APPLYING THIS SECTION BE ING THAT INCOME OF RS.ONE LAKH OR MORE SHOULD HAVE ESCAPED ASSESSME NT. THE ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 53 OF 57 REASONS RECORDED BY THE A.O HAVE NOT PINPOINTED AS TO WHICH TRANSACTION(S) OR EVENTS HAVE RESULTED IN UNDERASSE SSMENT OF INCOME OF RS.ONE LAKH OR MORE. IN THIS CONNECTION W E RELY ON THE UNDERMENTIONED DECISIONS FOR THE PROPOSITION TH AT WHERE THE ASSESSING OFFICER HAS NOT PINPOINTED THE ESCAPEMENT OF INCOME OF RS.ONE LAKH OR MORE, THE REOPENING OF ASSESSMENT IS NOT VALID. I) MAHESH KUMAR GUPTA VS C..T 33 TAXMANN.COM 409 A LL II) MRS.HARNIRANJAN KAUR VS I.T.O ITANOS 522 & 523/ ASR/2011 DATED, 31/10/2012 24. THE LD COUNSEL ARGUED THAT THE REASON TO BELIEV E MUST HAVE MATERIAL BEARING ON THE ESCAPEMENT OF INCOME. THE R EASON TO BELIEVE OPENS THE DOOR FOR REASSESSMENT. THE FIRST STEP IN PROCESS REASSESSMENT UNDER SECTION 143(3) READ WITH SECTION 147 IS ENQUIRY BASED ON THE REASON TO ASCERTAIN THE INCOME IF ANY HAD ESCAPED. NONE OF THE REASONS RECORDED BY THE AO IND ICATES A LEAD FOR FURTHER INQUIRY TO AN AREA OR GROUP OF TRANSACT IONS OF THE APPELLANT COMPANY. IT IS MOST IMPORTANT TO APPRECIA TE AT THIS JUNCTURE THE ROUTINE ENQUIRY CARRIED OUT BY THE AO AS IF I IS ASSESSMENT UNDER SECTION 143(3). HE DID NOT REFER T O THE 'INFORMATION GATHERED' WHICH WAS RECORDED AS THE RE ASON FOR ANY FURTHER ENQUIRY DURING THE ASSESSMENT PROCESS. NEIT HER THE ENQUIRY NOR THE ADDITIONS MADE HAD ANY NEXUS OR LIN K WITH SUPPOSED REASON FOR REOPENING OF ASSESSMENT. THE R EASON TO BELIEVE AS RECORDED HAD NOT LEFT ANY FOOTSTEPS ON T HE REASSESSMENT. THE REASSESSMENT U/S 143(3) R.W.S 147 CAUSED NORMAL INQUIRY THAT WOULD HAPPEN U/SI43(3) LEAVING UNDENIABLE ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 54 OF 57 EVIDENCE THAT THE REASSESSMENT WAS A NORMAL ASSESSM ENT IN GUISE OF REOPENING U/S 147. 25. THE LD COUNSEL CONTENDED THAT THE REASONS TO BE LIEVE MUST HAVE A RATIONAL CONNECTION WITH OR RELEVANT BEARING ON THE FORMATION OF THE BELIEF. THE REASON RECORDED MUST H AVE A RATIONAL CONNECTION WITH THE BELIEF. THE MATERIAL IN POSSESS ION OF THE AO SHOULD HAVE A DIRECT NEXUS TO THE SAID BELIEF. THE MATERIAL SHOULD BE ADEQUATE ENOUGH TO MAKE THE AO BELIEVE POSSIBLE ESCAPEMENT OF INCOME. THE TEST OF RATIONAL CONNECTION FAILS WH ERE THERE IS NO MATERIAL OR THE MATERIAL GIVES RISE ONLY A SUSPICIO N NOT LEADING TO BELIEF. THE MATERIAL SHOULD NOT BE VAGUE OR GUESS O R GOSSIP OR RUMOR. THE REASON CITED BY THE AO CANNOT BE PRETENC E TO REOPEN THE ASSESSMENT. IT CANNOT BE PURELY SUBJECTIVE SATI SFACTION OF THE AO. IT SHOULD BE CAPABLE TO BEING TESTED FOR CONNEC TION AND RATIONALITY TO CAUSE BELIEF. 26. THE LD COUNSEL ALSO RELIED ON THE LD COUNSEL F OR THE ASSESSEE RELIED ON THE FOLLOWING JUDICIAL PRECEDENT S: CIT VS. JET AIRWAYS (I) LTD (331 ITR 236) SWARNANDHARA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY (ITA NO.1803/HYD/2012). ACIT, RAIPUR VS. MAJOR DEEPAK MEHTA (24 TAXMANN.COM 147 CHATTISGARH). RANBAXY LABORATORIES LTD VS. CIT (12 TAXMANN.COM 74 DELHI) CIT VS. MOHD. JUNED DADANI (30 TAXMANN.COM I. GUJ.) ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 55 OF 57 27. WE HEARD BOTH THE PARTIES. IN A RECENT CASE THE HYDERABAD BENCH OF THE TRIBUNAL IN THE CASE OF ROHINI BOITECB (P) LTD AND OTHER, ITA NO.1233/HYD/2011 AND OTHER APPEALS JOINT LY DISPOSED VIDE ORDER DATED 31.12.2013, THE ISSUE OF SECTION 147, ESPECIALLY IN LIGHT OF SATYAM SCAM WAS EXAMINED. IN THESE SIXT EEN APPEALS ALSO, ASSESSMENTS WERE REOPENED ON SOLE GROUND THAT THESE COMPANIES ARE SAT YAM'S GROUP COMPANIES AND MR.RAMA LINGA RAJU'S LETTER SUGGESTS THE POSSIBLE EVASION OF TAX. THE HON'BLE TRIBUNAL HELD AS UNDER. (IV) THE REOPENING WAS ON WRONG FOUNDATION OF REASONING OF THE FINANCIAL IMPLICATION BETWEEN THE ASSESSEE-COMP ANY AND M/S SATYAM COMPUTER SERVICES LIMITED, WHICH WAS NO ESTABLISHED IN THE REASSESSMENT TO JUSTIFY R EOPENING. 19. HENCE, THERE BEING NO NEXUS OR LIVE-LINK WITH THE R EASONS RECORDED AND THE ' FORMATION OF BELIEF' TO COME TO A CONCLUSION THAT THERE WAS ESCAPEMENT OF INCOME AND ALSO SINCE THE ASSESSMENT HAS BEEN REOPENED BEYOND THE PERIOD OF 4 YEARS WHEN THERE IS NO FAILURE ON THE PART OF THE ASSESSE E TO FULLY AND TRULY DISCLOSE ALL MATERIAL FACTS IN THE ORIGIN AL ASSESSMENT ITSELF, AND THERE BEING , NO TANGIBLE MATERIAL 'FOR THE REOPENING OF THE ASSESSMENT, THE CIT(A) ERRED I N CONFIRMING THE ORDER OF THE ASSESSING OFFICER. WE, THEREFORE, HOLD THAT THE REOPENING OF THE JURISDICTION UNDER SECTION 147 IS BAD IN LAW AD IS TO BE QUASHED. ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 56 OF 57 28. WITH RESPECT TO THE REOPENING, WE HAVE ALREADY GIVEN OUR FINDING AT PARA.31 IN ITA NO.1136/HYD/2013 RELYING ON THE DECISION IN THE CASE OF RANJIT REDDY VS. DY. CIT, H YDERABAD (2013) 144 ITD 361, WHEREIN IT HAS BEEN HELD AS FOL LOWS: ONE NEEDS TO GIVE A SCHEMATIC INTERPRETATION TO TH E WORDS REASON TO BELIEVE FAILING WHICH, SECTION 14 7 WOULD GIVE ARBITRARY POWER TO AO TO REOPEN ASSESSME NTS ON THE BASIS OF MERE CHANGE OF OPINION, WHICH CANNO T BE PER SE REASON TO REOPEN. THE AO HAS NO POWER TO REVIEW; HE HAS THE POWER TO REASSESS. BUT REASSESSM ENT HAS TO BE TAXED ON FULFILMENT OF CERTAIN PRE-CONDIT IONS AND IF THE CONCEPT OF CHANGE OF OPINION IS REMOVE D, THEN, IN THE GARB OF REOPENING THE ASSESSMENT, REVI EW WOULD TAKE PLACE. ONE MUST TREAT THE CONCEPT OF CHA NGE OF OPINION AS AN INBUILT TEST TO CHECK ABUSE OF POW ER BY THE AO. HENCE, THE AO HAS POWER TO REOPEN, PROVIDED THERE IS TANGIBLE MATERIAL TO COME TO THE CONCLUS ION THAT THERE IS ESCAPEMENT OF INCOME FROM ASSESSMENT. REASONS MUST HAVE A LIVE LINK WITH THE FORMATION OF THE BELIEF. 29. FURTHER, PARA 32 AT PAGE 483 IN THE CASE OF S. RANJIT REDDY (SUPRA), READS AS FOLLOWS: SAME VIEW WAS TAKEN BY THE THIRD MEMBER MUMBAI BENCH IN THE CASE OF TELCO DADAJEE DHACKAJEE LTD VS . DY. CIT (ITA NO.4613/MUM/2005 DATED 12 TH MAY, 2010). FURTHER SAME VIEW WAS TAKEN BY DELHI HIGH COURT IN THE CASE OF CIT VS. ORIENT CRAFTS LTD (201 3) 29 TAXMANN.COM 392 AND ALSO BY GUJARAT HIGH COURT IN THE CASE OF INDUCTOTHERM INDIA (P) LTD V. DY. CIT I N SPECIAL CIVIL APPLICATION 858 OF 2006 DATED 6.8.201 2. FURTHER BOMBAY BENCH IN THE CASE OF DELTA AIRLINES INC. VS. ITO (INTERNATIONAL TAXATION) (2013) 33 TAXMANN.COM 192(MUM). 30. HENCE, WE ARE OF THE OPINION THAT THE ORDER PASSED BY THE AO U/S 143(3) R.W.S. 147 R.W.S. 144C(5) OF THE I.T. ACT, 1961 IS TO BE CANCELLED. HENCE WE ALLOW THE ASSESSEES APPEAL. ITA NOS.492 OF 08 AND OTHERS SATYAM VENTURE ENGG SE RVICES PVT LTD HYDERABAD PAGE 57 OF 57 31. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED. 32. TO SUM UP, APPEALS ARE DECIDED AS UNDER: APPEAL NO. A.Y. DECISION 492/HYD/2008 (ASSESSEE) 2003 - 04 ALLOWED 196/HYD/2008(ASSESSEE) 2003 - 04 ALLOWED 783/HYD/2008 (REVENUE) 2003 - 04 DISMISSED 924/HYD/2008 (ASSESSEE) 2003 - 04 DISMISSED 1136/HYD/2013 (ASSESSEE) 2003 - 04 ALLOWED 1137/HYD/2013 (ASSESSEE) 2004 - 05 ALLOWED. 1904/HYD/2011 (ASSESSEE) 2002 - 03 ALLOWED ORDER PRONOUNCED IN THE OPEN COURT ON 1 ST JULY, 2015. S D/ - S D/ - (P.M. JAGTAP) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED 1 ST JUY, 2015. VNODAN/SPS COPY TO: 1. M/S. SATYAM VENTURE ENGG. SERVICES (P) LTD. MAY FAI R CENTRE, SP ROAD, SECUNDERABAD 500003 2. COMMISSIONER OF INCOME TAX-III HYDERABAD 3. AO ACIT CIRCLE 3(1) HYDERABAD 4. THE DR, ITAT, HYDERABAD 5. GUARD FILE BY ORDER