M/s. Vijai Electricals Ltd., Hyderabad V. Addl.CIT, Range-3, Hyderabad

ITA 842/HYD/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 2903 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2007-2008
• Appeal Filed On: 28-05-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M BHUPAL REDDY
• Assessee Lawyers: S RAMA RAO
• Keywords: Revision of order; Transfer pricing; International transaction
• Section: 92C; 143(3); 92B; 92A; 92E; 263; 2; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA NO. 842/HYD/2012 ASSESSMENT YEAR: 2007-08 M/S VIJAI ELECTRICALS LTD., APPELLANT HYDERABAD. (PAN AAACV7259B) VS. ADDL. COMMISSIONER OF INCOME-TAX, RESPONDENT RANGE 3, HYDERABAD. APPELLANT BY : SHRI S. RAMA RAO RESPONDENT BY : SHRI M. BHUPAL REDDY DATE OF HEARING : 08/05/2013 DATE OF PRONOUNCEMENT : 31/05/ 2013 ORDER PER ASHA VIJAYARAGHAVAN, J.M.: THIS APPEAL PREFERRED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF CIT-III, HYDERABAD DATED 26/03/2012 PASSED U/S 263 OF THE ACT, FOR THE ASSESSMENT YEAR 2007-08. 2. THE ASSESSEE COMPANY M/S VIJAY ELECTRICALS LTD. IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF DISTRIBU TION AND POWER TRANSFORMERS AND RURAL ELECTRIFICATION PROJECTS ON TURN KEY BASIS. THE ASSESSEE FILED ITS RETURN OF INCOME FOR THE ASS ESSMENT YEAR 2007-08 ON 30/10/2007, DECLARING A TOTAL INCOME OF RS. 208,40,81,674/-. THE SCRUTINY ASSESSMENT WAS COMPLE TED U/S 143(3) ON 17/12/2009, DETERMINING TOTAL INCOME AT R S. 211,68,51,117/-. THE CIT PERUSED THE ASSESSMENT RE CORDS AND WAS OF THE OPINION THAT THE ORDER PASSED BY THE AO U/S 143(3) IS 2 ITA NO. 842/HYD/2012 M/S VIJAI ELECTRICALS LTD. ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF THE R EVENUE, HENCE, THE CIT PROCEEDED TO PASS THE ORDER U/S 263 AND HEL D THAT DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE COMPANY H AD INVESTED RS. 2118.84 LAKHS IN ITS SUBSIDIARIES OUTSIDE INDIA AS BELOW: S.NO. NAME OF THE SUBSIDIARY AMOUNT INVESTED IN RS. (LAKHS) 1 VIJAI ELECTRICAL DO BRASIL LTD 2114.82 2 VIJAI ELECTRICALS MEXICO SA DE CV 2.01 3 VIJAI ELECTRICALS MEXICO SERVICES SA DE CV 2.01 TOTAL 2118.84 THE CIT(A) HELD THAT THE ABOVE TRANSACTIONS ARE INTERNATIONAL TRANSACTIONS AS PER SECTION 94B OF TH E INCOME-TAX ACT. THE REPORT IN FORM NO. 3CEB AS REQUIRED U/S 92 E OF THE INCOME-TAX ACT, 1961 WAS NOT ENCLOSED TO THE RETURN OF INCOME. THE AO HAD COMPLETED THE ASSESSMENT WITHOUT EXAMINING/REFERRING THESE TRANSACTIONS TO THE TRANS FER PRICING OFFICER TO DETERMINE WHETHER THESE INVESTMENTS WERE MADE AT ARMS LENGTH. 3. THE CIT(A) ISSUED SHOW CAUSE NOTICE U/S 263 DATE D 21/09/2011 AND, IN REPLY, THE ASSESSEE FILED ITS WR ITTEN SUBMISSIONS DATED 03/10/2011 WHEREIN IT WAS SUBMITT ED THAT THE COMPANY WAS OF THE OPINION THAT THESE TRANSACTIONS ARE NOT IN THE NATURE OF TRANSACTIONS REFERRED IN SECTION 92B. IT WAS CONTENDED THAT ARMS LENGTH PRICE CANNOT ALSO BE DE TERMINED IN THIS CASE AS PER SECTION 92-C OF THE IT ACT, 1961. HOWEVER, THE CIT AFTER PERUSING THE EXPLANATION FILED BY THE ASS ESSEE HELD THAT THE SAME WAS NOT ACCEPTABLE AND VERIFICATION IS NEE DED AS TO WHETHER THE TRANSACTION DONE IS AT ARMS LENGTH PRI CE. THEREFORE, 3 ITA NO. 842/HYD/2012 M/S VIJAI ELECTRICALS LTD. THE CIT SET ASIDE THE ASSESSMENT MADE ON 17/12/2009 AND DIRECTED THE AO TO DO THE ASSESSMENT AFRESH AFTER REFERRING THESE TRANSACTIONS TO THE TPO AS PER THE PROVISIONS OF SE CTION 92C FOR DETERMINING THE ARMS LENGTH PRICE. 4. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US A ND RAISED THE FOLLOWED GROUNDS OF APPEAL: 1. THE ORDER OF THE LEARNED CIT IS ERRONEOUS BOTH O N FACTS AND IN LAW. 2. THE LEARNED CIT ERRED IN HOLDING THAT THE ORDER OF ASSESSMENT PASSED BY THE ADDL. CIT, RANGE-3, HYDERA BAD IS ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF THE R EVENUE. 3. THE LEARNED CIT ERRED IN HOLDING THAT THE TRANSA CTION OF INVESTMENTS MADE BY THE APPELLANT ARE GOVERNED BY T HE PROVISIONS OF SEC. 92E OF THE IT ACT. THE LEARNED C IT OUGHT TO HAVE OBSERVED THAT THE TRANSACTIONS MENTIONED BY HIM ARE NOT THE INTERNATIONAL TRANSACTIONS WITHIN THE M EANING OF THE PROVISIONS OF SEC. 94B AND THERE IS NO REQUIREM ENT OF FILING ANY AUDIT REPORT AS REQUIRED IN FORM NO. 3CE B. 4. THE LEARNED CIT ERRED IN HOLDING THAT THE ORDER IS PREJUDICIAL TO THE INTERESTS OF THE REVENUE WHEN TH E TRANSACTIONS WERE NOT DEALT IN ACCORDANCE WITH THE PROVISIONS OF SECTION 92B/92C OF THE IT ACT. 5. THE LEARNED CIT ERRED IN HOLDING THAT THERE IS A NY ERROR IN THE ORDER WHICH IS PREJUDICIAL TO THE INTERESTS OF REVENUE AND FURTHER ERRED IN SETTING ASIDE THE ASSESSMENT MADE. 6. THE LEARNED CIT ERRED IN DIRECTING THE AO TO REF ER THE TRANSACTIONS TO THE TPO AS PER THE PROVISIONS OF SE C. 92C OF THE IT ACT. 7. THE LEARNED CIT ERRED IN HOLDING THAT THERE ARE ANY INTERNATIONAL TRANSACTIONS WITH REGARD TO COMPUTATI ON OF INCOME AS CONTEMPLATED UNDER CHAPTER X. THE LEARNED CIT OUGHT TO HAVE SEEN THAT THE ORDER PASSED BY THE AO IS CORRECT AND JUSTIFIED. 8. THE LEARNED CIT ERRED IN SETTING ASIDE THE ORDER WHEN THERE BEING NO PREJUDICE CAUSED TO THE DEPARTMENT. 5. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ONLY TRANSACTION WERE CAPITAL INVESTMENTS MADE BY THE COMPANY AND THE TRANSACTIONS ARE NOT INTERNATIONAL TRANSACTIONS WITHIN THE MEANING OF PROVISIONS OF SECTION 94B OF THE IT ACT AND 4 ITA NO. 842/HYD/2012 M/S VIJAI ELECTRICALS LTD. HENCE, THERE WAS NO REQUIREMENT OF FILING ANY AUDIT REPORT IN FORM NO. 3CEB. THE LEARNED COUNSEL FURTHER CONTENDE D THAT THE CIT ERRED IN DIRECTING THE AO TO REFER THE TRANSACT IONS TO THE TPO AS PER THE PROVISIONS OF SECTION 92-C OF THE IT ACT AND THAT THE INVESTMENT IS MERELY INVESTMENT OF CAPITAL AND NOT A SALE TRANSACTION AS THE INVESTMENT DOES NOT GIVE RAISE T O ANY INTERNATIONAL TRANSACTION WITH REGARD TO COMPUTATIO N OF INCOME AS CONTEMPLATED UNDER CHAPTER X. THE LEARNED COUNSEL SUBMITTED THAT THE ORDER U/S 263 IS TO BE SET ASIDE AS THE OR DER OF THE AO IS NEITHER ERRONEOUS NOR PREJUDICIAL TO THE INTERESTS OF THE REVENUE. 6. THE LEARNED COUNSEL INVITED OUR ATTENTION TO PAG E 86 OF THE PAPER BOOK, WHICH IS THE REPLY GIVEN TO THE CIT WIT H RESPECT TO NOTICE U/S 263 OF THE IT ACT, AND THE SAME IS EXTRA CTED BELOW: 2. TRANSACTION WITH SUBSIDIARIES OUTSIDE INDIA RS. 2118.84 LAKHS. WE BRING TO YOUR KIND NOTICE THAT THE AMOUNTS REPRE SENTING RS. 2118.84 LAKHS IS TOWARDS INVESTMENT IN SHARE CA PITAL OF THE SUBSIDIARIES OUTSIDE INDIA AS MENTIONED IN YOUR NOTICE. WE BRING TO YOUR KIND NOTICE THAT, WE ARE OF THE OP INION THAT THE TRANSACTION ARE NOT IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY, OR PROVIS ION OF SERVICES, OR LENDING OR BORROWING MONEY, OR ANY OTH ER TRANSACTION AS MENTIONED IN SECTION 92B OF THE IT A CT, 1961. AS THE TRANSACTION ARE NOT IN THE NATURE OF TRANSAC TION REFERRED TO IN SECTION 92B OF THE IT ACT, 1961, THE ARMS LENGTH PRICE HAS NOT BEEN DETERMINED AS PER SECTION 92C OF THE IT ACT, 1961. WE REQUEST YOU TO KINDLY CONSIDER THE ABOVE AND AS THE ORDER PASSED U/S 143(3) OF THE IT ACT, 1961 DATED 17/12/2009 FOR THE AY 2007-08 IN NOT ERRONEOUS OR PREJUDICIAL TO THE INTERESTS OF THE REVENUE. KINDLY DROP THE REVISION PROCEEDINGS INITIATED U/S 263 OF THE IT AC T, 1961 AND OBLIGE. 5 ITA NO. 842/HYD/2012 M/S VIJAI ELECTRICALS LTD. 7. THE LEARNED COUNSEL REFERRED TO THE CIRCULAR NO . 14, DATED 22/11/2011, AND SUBMITTED THAT SECTION 92B(1) IS AP PLICABLE ONLY WHEN INCOME IS CHARGEABLE AND NOT FOR CAPITAL INVES TMENT. THE RELEVANT PORTION OF THE CIRCULAR IS EXTRACTED BELOW : 55.6 THE SUBSTITUTED NEW SECTIONS 92A AND 92B PROVI DE MEANINGS OF THE EXPRESSIONS ASSOCIATED ENTERPRISE AND INTERNATIONAL TRANSACTION WITH REFERENCE TO WHICH THE INCOME IS TO BE COMPUTED UNDER THE NEW SECTION 92. WHILE SUBSECTION (1) OF SECTION 92A GIVES A GENERAL DEFIN ITION OF ASSOCIATED ENTERPRISES, BASED ON THE CONCEPT OF PAR TICIPATION IN MANAGEMENT, CONTROL OR CAPITAL, SUB-SECTION (2) SPECIFIES THE CIRCUMSTANCES UNDER WHICH THE TWO ENTERPRISES S HALL BE DEEMED TO BE ASSOCIATED ENTERPRISES. 55.7. SECTION 92B PROVIDES A BROAD DEFINITION OF INTERNATIONAL TRANSACTION, WHICH IS TO BE READ WITH THE DEFINITION OF TRANSACTION GIVEN IN SECTION 92F. AN INTERNATIONAL TRANSACTION IS ESSENTIALLY A CROSS BO RDER TRANSACTION BETWEEN ASSOCIATED ENTERPRISES IN ANY S ORT OF PROPERTY, WHETHER TANGIBLE OR INTANGIBLE, OR IN THE PROVISION OF SERVICES, LENDING F MONEY ETC., AT LEAST ONE OF THE PARTIES TO THE TRANSACTION MUST BE A NON-RESIDENT. THE DEFI NITION ALSO COVERS A TRANSACTION BETWEEN TWO NON-RESIDENTS , WHERE FOR EXAMPLE, ONE OF THEM HAS A PERMANENT ESTABLISHM ENT WHOSE INCOME IS TAXABLE IN INDIA. 55.8. SUB-SECTION (2) OF SECTION 92B EXTENDS THE S COPE OF THE DEFINITION OF INTERNATIONAL TRANSACTION BY P ROVIDING THAT A TRANSACTION ENTERED INTO WITH AN UNRELATED P ERSON SHALL BE DEEMED TO BE A TRANSACTION WITH AN ASSOCIA TED ENTERPRISES, IF THERE EXISTS A PRIOR AGREEMENT IN R ELATION TO THE TRANSACTION BETWEEN SUCH OTHER PERSON AND THE ASSOCIATED ENTERPRISE, OR THE TERMS OF THE RELEVANT TRANSACTION ARE DETERMINED BY THE ENTERPRISE. AN IL LUSION SUCH A TRANSACTION COULD BE WHERE THE ASSESSEE, BEI NG AN ENTERPRISE RESIDENT IN INDIA, EXPORTS GOODS TO AN U NRELATED PERSON ABROAD, AND THERE IS A SEPARATE ARRANGEMENT OR AGREEMENT BETWEEN THE UNRELATED PERSON AND AN ASSOC IATED ENTERPRISE WHICH INFLUENCES THE PRICE AT WHICH THE GOODS ARE EXPORTED. IN SUCH A CASE THE TRANSACTION WITH THE U NRELATED ENTERPRISE WILL ALSO BE SUBJECT TO TRANSFER PRICING REGULATIONS. 6 ITA NO. 842/HYD/2012 M/S VIJAI ELECTRICALS LTD. 8. THE LEARNED COUNSEL RELIED UPON THE DECISION IN THE CASE OF DANA CORPORATION RE, 321 ITR 178 (AAR) WHEREIN IT H AS BEEN HELD AS FOLLOWS: SECTION 92 IS NOT AN INDEPENDENT CHARGING PROVISION . THE EXPRESSION INCOME ARISING IN THE OPENING WORDS OF SECTION 92 POSTULATES THAT INCOME HAS ARISEN UNDER THE SUBS TANTIVE CHARGING PROVISIONS OF THE ACT. IF BY APPLICATION O F THE PROVISIONS OF SECTION 45 READ WITH SECTION 48, WHIC H ARE INTEGRALLY CONNECTED ONE WITH THE OTHER, INCOME CAN NOT BE SAID TO ARISE, SECTION 92 DOES NOT COME TO THE AID OF THE REVENUE EVEN THOUGH IT IS AN INTERNATIONAL TRANSACT ION. SECTION 92 OBVIOUSLY IS NOT INTENDED TO BRING IN A NEW HEAD OF INCOME OR TO CHARGE TAX ON INCOME WHICH IS NOT O THERWISE CHARGEABLE UNDER THE ACT. 9. THE LEARNED COUNSEL ALSO RELIED UPON THE DECISIO N IN THE CASE OF AMIANTIT INTERNATIONAL HOLDING LTD., 322 ITR 678 (AAR) WHEREIN IT WAS HELD THAT IN A CASE WHERE INCOME WAS NOT CHA RGEABLE AT ALL TRANSFER PRICING PROVISIONS OF SECTION 92-B(I) OF T HE IT ACT WOULD NOT APPLY. 9. THE LEARNED DR, ON THE OTHER HAND RELIED UPON TH E DECISION ITAT MUMBAI BENCH B IN THE CASE OF BOARD OF CONTR OL FOR CRICKET IN INDIA VS. DIT (EXEMPTION), [2005] 96 ITD 263 (MU M) WHEREIN IT WAS HELD THAT THE SAID ORDER DID NOT SHOW THAT THE AO HAD CONSIDERED OR APPLIED HIS MIND TO THE FACTUAL AND L EGAL ASPECTS OF THE CASE. IT WAS A STEREOTYPED ORDER WHICH SIMPLY A CCEPTED WHAT THE ASSESSEE STATED IN ITS APPLICATION WITHOUT PROP ER EXAMINATION OF THE FACTUAL AND LEGAL ASPECTS OF THE CASE. AN OR DER MAY BE RENDERED ERRONEOUS DUE TO ERROR IN APPROACH, ERROR IN COMPUTATION, ERROR IN APPLYING THE RELEVANT LAW OR FACTS OR ERROR IN SELECTING A PRINCIPLE WHICH WOULD NOT GOVERN THE FACT SITUATION. LIKEWISE, ARBITRARY EXERCISE OF QUASI-JUDICIAL POWE R WITHOUT DUE CONSIDERATION OF THE RELEVANT ASPECTS OF THE CASE W OULD ALSO RENDER THE RESULTANT ORDER ERRONEOUS WITHIN THE MEA NING OF 7 ITA NO. 842/HYD/2012 M/S VIJAI ELECTRICALS LTD. SECTION 263. IN THIS VIEW OF THE MATTER, THE SUBMIS SIONS OF THE ASSESSEE THAT THE ORDER PASSED BY THE AO U/S 195(2 ) WAS NOT ERRONEOUS WITHIN THE MEANING OF SECTION 263 COULD N OT BE UPHELD. THE SAID ORDER WAS AN ERRONEOUS ORDER CAPABLE OF BE ING REVISED U/S 195(2) PROVIDED OTHER CONDITIONS OF SECTION 263 WERE ALSO FULFILLED. THE LEARNED DR ALSO RELIED UPON IN THE CASE OF CIT VS. SRI MAHASASTHA PICTURES, [2003] 263 ITR 304 (MAD.). 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS, PERUS ED THE RECORD AND HAVE GONE THROUGH THE ORDERS OF THE AUTH ORITIES BELOW AS WELL AS DECISIONS CITED. IN OUR OPINION, THE AMO UNT REPRESENTING 2118.84 IS TOWARDS INVESTMENT IN SHARE CAPITAL OF THE SUBSIDIARIES OUTSIDE INDIA AS THE TRANSACTIONS ARE NOT IN THE NATURE OF TRANSACTIONS REFERRED TO SECTION 92-B OF THE IT ACT AND THE TRANSFER PRICING PROVISIONS ARE NOT APPLICABLE AS THERE IS NO INCOME. ACCORDINGLY, WE SET ASIDE THE ORDER PASSED BY THE CIT U/S 263 AND THAT OF THE AO IS RESTORED AND THE GROUNDS RAISED BY THE ASSESSEE IN THIS REGARD ARE ALLOWED. 11. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D. PRONOUNCED IN THE OPEN COURT ON 31 ST MAY, 2013. SD/- SD/- (CHANDRA POOJARI) (ASHA VIJAYARAGH AVAN) ACCOUNTANT MEMBER JUDICIAL MEMBE R HYDERABAD, DATED: 31 ST MAY, 2013. KV 8 ITA NO. 842/HYD/2012 M/S VIJAI ELECTRICALS LTD. COPY TO:- 1) M/S VIJAY ELECTRICALS LTD., C/O SHRI S. RAMA RAO, ADVOCATE, FLAT NO. 102, SHRIYAS ELEGANCE, ST. NO. 9, HIMAYATNAGAR, HYDERABAD 500 029. 2) ADDL. CIT, RANGE 3, HYDERABAD. 3) CIT-III, HYDERABAD 4) THE DEPARTMENTAL REPRESENTATIVE, I.T. A.T., HYDERABAD.