[Coca Cola India Inc. v. ACIT & Ors., (2011) 336 ITR 1 (SC)]
The petitioner, a company incorporated under the laws of the United States of America and thus a foreign company u/s. 2(23A) of the Act, had a branch office in India. It was a part of the International Coca Cola corporate group. The said group had other companies operating in India incorporated under the Companies Act, 1956. The petitioner obtained permission u/s. 29(1)(a) of the Foreign Exchange Regulation Act, 1973, (FERA) to operate a branch office in India to render a services to the Coca Cola group companies, as per conditions mentioned in the application for the said permission. There is a service agreement between the petitioner on the one hand and Britco Foods Company Private Limited (Britco) on the other.
As per the said agreement, the petitioner provides advisory services to Britco to advise, monitor and co-ordinate the activities of bottlers, in consideration of which the petitioner receives fee calculated on the basis of actual cost plus 5%. The petitioner was assessed under the Act for the A.Y. 1998-99 on 31st March, 2004. The Assessing Officer, however, formed an opinion that income of the petitioner, chargeable to tax for the said year, had escaped assessment within the meaning of section 147 of the Act. A notice dated 30th March, 2005, was issued u/s. 148 of the Act, requiring the petitioner to file a return and thereafter, some further information was sought from the petitioner for the purpose of assessment. The petitioner filed reply to the said notice, seeking reasons for the proposed reassessment.
The reasons indicated that the Assessing Officer referred to section 92 of the Act, which enables the Assessing Officer to determine profits which may reasonably deemed to have been derived, when less than ordinary profits are shown to have been derived by a resident. It was further stated in the said reasons that as per the order dated 7th February, 2005, u/s. 92CA(3) for the A.Y. 2002- 03, passed by the Transfer Pricing Officer-1, the profit declared by the petitioner was abnormally low, on account of which arm’s-length price had been fixed. On that account, the income of the assessee had escaped assessment. Similar notices were issued for the A.Ys. 1999-2000, 2000-01 and 2001-02. On 14th July, 2005, notice u/s. 92CA(3) of the Act was issued by the Additional Commissioner of Income-tax acting as Transfer Pricing Officer, on a reference made by the Assessing Officer u/s. 92CA(1) of the Act for the A.Y. 2003-04, to determine arm’s-length price. Identical notices were issued for the A.Ys. 2004-05, 2005-06 and 2006-07.
The Assesssing Officer made assessment in respect of income of the petitioner for the A.Y. 2002-03, vide order dated 24th March, 2005, after getting determined arm’s-length price of services rendered by the petitioner to its associated company, thereby enhancing the income of the assessee. Against the said order, the petitioner preferred an appeal which is pending before the appropriate authority. The petitioner filed a writ petition before the Punjab & Haryana High Court on 19th October, 2005. On 21st October, 2005, notice was issued to the respondents and, vide order dated 18th November, 2005, stay of passing of final order for the A.Ys. 2003-04, 2004-05, 1998-99 to 2001-02 was granted. Similarly, on 15th December, 2006, stay of passing final order for the A.Y. 2005-06 was granted and permission to amend the petition was also granted to challenge the notice in respect of the said year.
Similarly, on 26th May, 2008, stay of passing of final order for the A.Y. 2006-07 was granted. The petitioner further amended the petition to challenge the notice in respect of the A.Y. 2006-07, which amendment had been allowed by a separate order. The main contention raised in the writ petition was that the provisions of Chapter X, i.e., section 92 to 92F of the Act have been enacted with a view to prevent diversion of profits in intra-group transactions leading to erosion of tax revenue. The said provisions have been incorporated, vide Finance Act, 2001, and further amended, vide Finance Act, 2002. Having regard to the object for which the provisions have been enacted, applicability of the said provisions has to be limited to situations where there is diversion of profits out of India or where there may be erosion of tax revenue in intra-group transaction. In the present case, there was neither any material to show diversion of profits outside India, nor of erosion of tax revenue. If the price charged was less and profit of the petitioner was less, there was corresponding lesser claim for deduction by Britco.
Question of diversion of profits out of India would arise only if price charged is higher and that too if the higher profit was not subject to tax in India, which was not the situation in the present case. Further contention was that there was no occasion for determining arm’s-length price as the price determined by the petitioner itself was as per section 92(1) and (2) of the Act, i.e., cost plus 5%. In such a situation, there was no occasion to make reference to the Transfer Pricing Officer. Even if the reference was sought to be made, the petitioner was entitled to be heard before such a decision is taken, so that it could show that reference to the Transfer Pricing Officer was not called for. In objecting to the notices for reassessment, contention raised was that the provisions of Chapter X having been introduced only from 1st April, 2002, there could be no reassessment for the period from April 1, 1997, to 31st March, 2001. It was pointed out that prior to the amendment with effect from April 1, 2002, u/s. 92 of the Act, there was a provision for determination of reasonable profits deemed to have been derived by a resident and not a ‘non-resident’.
The amended provision could not be applied to the petitioner for the period prior to 31st March, 2001. In the reply filed on behalf of the respondents, the impugned notices and orders were defended. As regards the period prior to the A.Y. 2002-03, when the amended provisions of Chapter X were not operative, the stand of the respondents was that the petitioner suppressed its profit in its transactions with its associated companies, which was clear from the proportion of amount of working capital employed to the declared profit and this resulted in escapement of income within the meaning of section 147 of the Act. As regards the period for and after the A.Y. 2002- 03, it was submitted that the said Chapter was applicable to the petitioner as the petitioner had entered into ‘international transaction’ within the meaning of the said provisions with its ‘associated enterprises’. There was no condition that the said Chapter could apply only if the parties were not subject to the tax jurisdiction in India. The only requirement is that at least one of the parties should be non-resident, apart from other requirements in the said Chapter.
According to the High Court the following questions arose for its consideration: “
(i) Whether inapplicability of the unamended provisions of section 92 of the Act (as it stood prior to 1st April 1, 2002) to the petitioner created a bar to reassessment of escaped income of the petitioner?
(ii) Whether the order passed by the Transfer Pricing Officer under Chapter X after 1st April, 2002, could be one of the reasons for reassessment for period prior to introduction of the amended Chapter X in the Act?
(iii) Whether the provisions of Chapter X are attracted when both the parties to a transaction are subject to tax in India, in the absence of allegation of transfer of profits out of India or evasion of tax?
(iv) Whether opportunity of being heard is required before referring the matter of determination of arm’s-length price to the Transfer Pricing Officer?”
The above questions framed by the High Court were dealt by it as under:
Re: Question No. (i)
The High Court noted that the objection of the petitioner was twofold: (a) Reference to inapplicable provisions of section 92 of the Act, as it stood prior to the amended with effect from 1st April, 2002, and (b) irrelevance of the order of the Transfer Pricing Officer under Chapter X passed in respect of a subsequent assessment year.
The High Court held that section 147 of the Act requires formation of opinion that income has escaped assessment. The said provision is not in any manner controlled by section 92 of the Act, nor is there any limit to consideration of any material having nexus with the opinion on the issue of escapement of assessment of income. Interference with the notice for reassessment is called for only where extraneous or absurd reasons are made the basis for opinion proposing to reassess. Apart from the fact that the Assessing Officer had given other reasons, it cannot be held that the material relied upon by the Assessing Officer for proposing reassessment was irrelevant. Whether or not the said material should be finally taken into account for reassessment was a matter which had to be left open to be decided by the Assessing Officer after considering the explanation of the assessee. The High Court was of the view that having regard to the relationship of the petitioner to its associate company, it could not be claimed that the price mentioned by it must be accepted as final and may not be looked at by the Assessing Officer.
Reg: Question No. (ii)
As regards the question whether order of the Transfer Pricing Officer could be taken into account, the High Court was of the view that there could not be any objection to the same being done. Requirement of section 147 of the Act is fulfilled if the Assessing Officer can legitimately form an opinion that income chargeable to tax has escaped assessment. For forming such opinion, any relevant material can be considered. The order of Transfer Pricing Officer can certainly have nexus for reaching the conclusion that income has been incorrectly assessed or has escaped assessment. The High Court observed that in the present case, the said material came to the notice of the Assessing Officer subsequent to the assessment. There was no grievance that the provisions of section 148 to 153 of the Act had not been followed. In such a situation, it could not be held that the notice proposing reassessment was vitiated merely because one of the reasons referred to the order of the Transfer Pricing Officer.
Reg: Question No. (iii)
The High Court did not find any ambiguity or absurd consequence of application of Chapter X to persons who were subject to jurisdiction of taxing authorities in India, nor could find any statutory requirement of establishing that there was transfer of profits outside India or there was evasion of tax. The only condition precedent for invoking provisions of Chapter X was that there should be income arising from international transaction and such income had to be computed having regard to arm’s-length price. ‘International transaction’ as defined u/s. 92B of the Act, stood on different footing than any other transaction. Arm’s -length price was nothing but a fair price which would have been normal price. There was always a possibility of transaction between a non-resident and its associates being undervalued and having regard to such tendency, a provision that income arising out of the said transaction could be computed having regard to arm’s-length price, would not be open to question and was within the legislative competence to effectuate the charge of taxing real income in India.
The High Court did not find any merit whatsoever in the contention that provisions of Chapter X could not be made applicable to parties which were subject to jurisdiction of taxing authorities in India, without there being any material to show transfer of profits outside India or evasion of tax between the two parties. The contention that according to the permission granted by the Reserve Bank of India under the Foreign Exchange Regulation Act, the assessee could not charge more than particular price, could also not control the provisions of the Act, which provides for taxing the income as per the said provision or computation of income, having regard to arm’s-length price in any international transaction, as defined.
Reg: Question No. (iv)
The High Court held that when it is a matter of assessment by one or other officer and the assessee is to be provided opportunity, in the course of the assessment, there was no merit for inferring further opportunity at the stage of decision of the question, whether the Assessing Officer himself is to compute the arm’s-length price or to make a reference to the Transfer Pricing Officer for the said purpose.
On an appeal, the Supreme Court observed that the issue in the Special Leave Petition concerned the
application of the principle of transfer pricing. In this case a notice was issued u/s. 148 of the Act for some of the assessment years. On the question of jurisdiction, a writ petition was filed by the assessee, which was disposed of by the High Court in the writ jurisdiction. The Supreme Court, however, on going through the papers, found that foundational facts were required to be established, which could not have been done by way of writ petition. For the aforestated reasons, the Supreme Court was of the view that the assessee should be relegated to adopt proceedings, which were pending, as of date, before various authorities under the Act.
The Supreme Court accordingly, directed the authorities to expeditiously hear and dispose of pending proceedings as early as possible. If the petitioner- assessee was aggrieved by the orders passed by any of these authorities, it would have to exhaust the statutory remedy provided under the Act. It was made clear that each of the authorities would decide the matter uninfluenced by any of the observations made by the High Court.
The special leave petition was disposed of accordingly.
