Cargill
India (P.) Ltd.
v.
Deputy
Commissioner of Income-tax, Cir. 3(1), New Delhi
VIMAL
GANDHI, PRESIDENT
AND
DEEPAK R. SHAH, ACCOUNTANT MEMBER
IT
Appeal No. 1844(Delhi) of 2007
[Assessment
year 2003-04]
February
15, 2008
Section
92D, read with sections 271G and 273B, of the Income-tax Act, 1961 and rule 10D
of the Income-tax Rules, 1962 - Transfer pricing - Maintenance and keeping of
information and document by person entering into an international transaction -
Assessment year 2002-03 - Whether statutory scheme envisages that TPO shall
first serve notice under section 92CA(2) requiring assessee to produce evidence
in support of his computation of Arm’s Length Price (ALP) and it is only if
complete information is not furnished, or otherwise, TPO is of view that more
information on specified points is required from assessee, that he can issue
notice under section 92D(3); there is no rationality in requiring information,
documents from assessee first under section 92D(3) and thereafter provide
opportunity to assessee to support its ALP - Held, yes - Whether further,
notice under section 92D(3) cannot be vague but must require specific
information or document which according to TPO is necessary for determination
of ALP of international transactions - Held, yes - Whether under section
92D(3), it will not be possible to call for all information prescribed under
rule 10D including supporting information and documents mentioned in rule
10D(3) in a routine or casual manner without application of mind as to what
specific information is required to achieve said purpose; information, which
has already been furnished by assessee either in audit report or in response to
notice under section 92CA(2), would be of no use and there is no point in
requiring same information again or require unprescribed information under
section 92D(3) and cast additional burden on assessee; in all such cases,
notice would no more remain valid notice under section 92D(3)/271G - Held, yes
- In respect of international transactions carried by assessee during relevant
year, Assessing Officer made reference to TPO for determination of ALP of those
transactions - TPO issued notices and asked assessee to support and
substantiate computation of ALP in said transactions - TPO further required
assessee to furnish information including balance sheet, profit and loss
account, statement of computation of income, audit report, tax report and also
information and documents maintained as prescribed under section 92D, without
specifying any particular information clause of rule 10D - Assessee submitted
those documents, though with a delay of about one month - As regards delay, it
was explained that same took place on account of a reasonable cause as its
financial controller, being out of town, was not available to furnish
information which was voluminous and highly technical in nature - However,
Assessing Officer concluded that by not submitting required documents in time,
assessee committed a default under section 271G and, thus, imposed penalty on
assessee under section 271G -Whether since notices in question were issued by
TPO without application of mind and without considering documents already
placed by assessee on record and without consideration as to which of specific
clauses of sub-rule (1) or other sub-rules of rule 10D was attracted or which
relevant information was needed, said notices could not be treated as valid and
legal notices in terms of section 92D(3) and failure of assessee to comply with
such notices in time could not justify levy of penalty under section 271G -
Held, yes - Whether moreover, since Assessing Officer recorded no finding on
reasonable cause and imposed penalty without considering section 273B,
imposition of impugned penalty on mere technical ground, was not sustainable -
Held, yes
Section
271G of the Income-tax Act, 1961 - Penalty - For failure to furnish information
or document under section 92D - Assessment year 2002-03 - Whether provisions of
section 271G are quite different from provisions of section 271(1) and,
therefore, no satisfaction need be recorded before initiating proceedings under
section 271G - Held, yes
The assessee-company was a wholly owned
Indian subsidiary of a foreign company. During the relevant assessment year,
the assessee carried various transactions with its foreign associate
enterprises. As the value of said transactions exceeded Rs. 5 crores, the
Assessing Officer made reference to the Transfer Pricing Officer (TPO) for
determination of the Arm’s Length Price (ALP) of those transactions. The TPO
issued notices and asked the assessee to support and substantiate the
computation of ALP. He further required the assessee to furnish information
including the balance sheet, profit and loss account, statement of computation
of income, audit report, tax report and also information and documents
maintained as prescribed under section 92D read with rule 10D. The TPO in his
order observed that taxpayer had failed to comply with provisions of section
92D read with rule 10D by not furnishing information in time and, therefore,
action under sections 271AA and 271G should be taken by the Assessing Officer.
Accordingly, penalty proceedings under section 271G were taken and after
hearing the taxpayer and after obtaining report from the TPO, penalty of nearly
Rs. 40 crores was imposed and upheld by the Commissioner (Appeals).
On second appeal, the assessee contended that
provisions of section 271G can be invoked only in a case where prescribed
information and documents are not furnished within the prescribed time and
since in the instant case, the TPO had called for ‘all’ the information which
had been maintained by the assessee in relation to the international
transactions, notices could not be said to be valid notices under section
92D(3), non-compliance of which would attract penalty under section 271G. In
the alternative, the assessee submitted that the implementation of transfer
pricing policy being at initial stage, the documents were filed as per the
understanding of the new law by the assessee and as per the advice received by
him from time to time relating to Transfer Pricing Regulations; that there was
no mala fide intention on the part of the assessee to commit any
default; and that the default, if any, of few days could not be said to be
without a reasonable cause.
The documents and information prescribed under rule 10D is voluminous and it would only be in rarest cases, that all the clauses of sub-rules would be attracted. It is not possible to casually ask for information under all the clauses. It is likely that in some cases, the assessee need not carry any analysis of functions performed, risk assumed and assets employed; there may be an exactly similar uncontrolled transaction with independent unconnected party to establish that transaction was an arm’s length transaction. In such a case, clause (e) of rule 10D(1) would have no application and no information under this clause need be maintained or produced before the tax authorities. Likewise, there might be no necessity to carry economic analysis, take forecasts, budgets or other financial estimates of business. International transaction involved may be of such a nature, that analysis and forecasts, etc., mentioned above have no connection or relevance for the determination of ALP. Depending upon the nature of the transaction, question of application of assumptions, policies or price negotiations and, therefore, of clause (k) of sub-rule (1) would arise. This is itself indicated in the said clause by use of word ‘if any’. It is, therefore, clear that one or more clauses of sub-rule (1) are applicable and not all clauses of the rule in a given case. It would all depend upon the facts and circumstances of the case, more particularly the nature of international transactions carried or services involved.
Likewise, supporting documents, official publications, reports, market research studies, technical publications of the Government or other institute of national or international repute, and all the documents mentioned in rule 10D(3) may not be needed in case of every assessee. Stock exchange, price publication or commodity, market quotations would only be relevant in cases of international transactions involving stock or commodities. Such information would be totally irrelevant in cases of transactions, say for example relating to ‘intangibles’. Application of one or more clauses of sub-rule (3) would depend upon facts involved in the international transactions. Further, if official publications are needed in the case, other documents like report, studies, and data from the Government agencies mentioned in the same clause might not be required. Information even in the same clause may be alternative in some cases. It is evident from the information/documents prescribed in sub-rules of rule 10D that the assessee and the tax authorities are to see what information and documents and from which particular clause is relevant and, therefore, needed for determining ALP. The consideration of this aspect is material before issuing notice under section 92D(3), if it is to serve its purpose.
The abovesaid prescribed information is gathered from the assessee through various means and at different stages of the assessment proceedings. The initial or first information relating to international transactions is gathered from the assessee in the prescribed audit report in Form 3CEB. This report is required to be submitted along with the return of income as per section 92E. [Para 22.5]
It is clear from Form 3CEB that the name and addresses of the assessee, its associated concerns, nature of relationship with such concerns, brief description of business and details of international transactions carried on with the associated enterprises, besides the method used for determining ALP in respect of each international transaction is required to be given in the audit report. [Para 24]
The Assessing Officer must have the audit report in Form 3CEB with him to determine the question whether total value of the transactions is more or less than Rs. 5 crore (now enhanced to Rs. 15 crore) to consider the question whether determination of ALP is to be referred to the TPO or not. If the total value exceeds the prescribed limit, the Assessing Officer has to refer the matter to the TPO. [Para 24.1]
It is, therefore, reasonable to presume that in every transfer pricing case, relevant information, along with Form 3CEB is available on record and the Assessing Officer/TPO is supposed to proceed with the basic and initial information of international transactions carried by the assessee in the relevant period as disclosed in Form 3CEB. He is supposed to have specialized training and, therefore, understand what job he is to perform for achieving the purpose of the Regulations. [Para 24.2]
Therefore, it is clear that information prescribed under rule 10D in different column is voluminous, alternative and it would have to be seen as to what information and from which clause, is required on the facts of the given case. Secondly, information from certain clauses of rule 10D is obtained in audit report in Form 3CEB required to be filed along with the return. Thirdly, the TPO, before proceeding to determine ALP, has above basic and initial information of international transactions carried by the assessee. [Para 24.3]
Armed with the said initial information and when knowing details of international transactions carried by the assessee and the method employed to determine the ALPs of transactions, further proceedings are carried towards determination of ALP. [Para 24.4]
Provisions of section 92D(3) can be applied in the following circumstances :
(i) in the course of the proceedings under the Act before the Assessing Officer or the Commissioner (Appeals).
(ii) Any documents or information prescribed under sub-section (1) may be required.
(iii) information is required to be furnished under sub-section (3) within 30 days (as extended by another 30 days) from the receipt of notice issued in this regard.
Thus, the Assessing Officer or the Commissioner (Appeals) may require (from any person) any information or document as may be prescribed. Word ‘any’ information or document cannot ordinarily mean ‘all’ the documents prescribed under rule 10D. The word ‘required’ is important as it rules out option with the assessee and makes it obligatory to furnish the requisite information.
It is clear from above that the power under section 92D(3) can be used in the course of the assessment proceedings, i.e., in proceedings for determination of ALP and only for requiring to furnish prescribed information or documents under rule 10D. It being a provision connected with procedure to help an assessment, must be purposefully construed. But, regulation does not provide any time or stage when power to issue notice is to be exercised. However, scheme of assessment do indicate the stage at which it is to be issued and the purpose which is required to be achieved through the issuance of such a notice. [Para 24.6]
The TPO is thereafter required to serve notice under sub-section (2) of section 92CA. The statutory scheme envisages that the TPO shall serve a notice requiring the assessee to produce evidence in support of his computation of ALP. Therefore, an opportunity to prove that its ALP is correct has to be allowed to the assessee. It is mandatory requirement of the regulations. Thereafter, notices under section 92D(3) may be issued requiring the assessee to furnish information on ‘specified points’, depending upon the facts of the case. It is not that issuance of notice under section 92D(3) along with notice under section 92CA(2) is illegal, but where heavy penalty is attracted for non-compliance, it has to be shown that the notice under section 92D(3) is complied, both in letter and in the spirit of the statute. This conclusion is based on the scheme and the clear language used in the regulations. Steps as per regulations are to be followed in sequence. Report in Form No. 3CEB in the first instance, is obtained from the assessee. Next step is to issue notice under section 92CA(2) to the assessee to produce evidence in support of ALP. [Para 24.7]
Under sub-section (2) of section 92CA, evidence in support of ALP would ordinarily include information and documents referred to in sub-section (3) of section 92D which are prescribed in various clauses of rule 10D(1). Documents and information prescribed are required to be maintained to help to determine ALP and are to be filed to support ALP by the assessee in response to the notice under section 92CA(2). If on consideration of evidence produced by the assessee, the TPO is satisfied that ALP has been properly and correctly determined by the assessee, it is the end of the matter. There is no question of issuing further notice under any provision to the assessee. However, if complete information is not furnished, or otherwise, the TPO is of the view that more information on specified points is required from the assessee, he can issue notice under sub-section (3) of section 92D. The TPO can also issue notice under section 92CA(3), depending upon the facts of the case and the information needed. Only in case of failure of the assessee to support its ALP by filing necessary evidence, question of requiring the assessee to furnish prescribed information would arise. There is no rationality in requiring information, documents from the assessee first under section 92D(3) and thereafter provide opportunity to the assessee to support its ALP. Further, having regard to purpose of the regulations, the notice under section 92D(3) must require specific information (or document) which the assessee failed to furnish under section 92CA(2), but which, according to the TPO, is necessary for determination of ALP of international transactions.
The said view is fully supported by sub-section (3) of section 92CA providing for the determination of the ALP by the TPO. Besides evidence/material referred to in the said sub-section, the TPO is further required to consider ‘such evidence as TPO may require on specified points’. Thus, the requirement of evidence on specific points is clearly stated. Therefore, the notice under section 92D(3) cannot be vague but must require specific information. This is established from clear language and scheme of the regulation. [Para 25]
Thus, the notice under section 92D(3) is different from other statutory notices. Here, the Assessing Officer or the Commissioner (Appeals) is empowered to require from the assessee or any person, who has entered into an international transaction, to furnish any prescribed information or document. Notice under section 92D(3) has to be confined to the furnishing of information or document as may be ‘prescribed’. It is unauthorized to require the notice to furnish non-prescribed information. If in the notice, non-prescribed information is also called for, it would not be treated as notice under section 92D(3), but under section 92CA(3) or some other provision of the Act, irrespective of the title or label given to such a notice. Relevant information can be sought under notice under section 92CA(3) also. Further, there is no restriction on furnishing prescribed information in response to notice under section 92CA(2) to support the computation of ALP by the assessee. However, the TPO is not authorised under section 92D(3) to require the assessee to furnish non-specified information or such information or document already filed by the assessee, or use the provision without asking the assessee to support first its ALP of international transactions. The case of any person other than the assessee for notice under section 92D(3) stands on a different footing than of the assessee to whom notice under section 92CA(2) has been issued. [Para 27]
Further, under section 92D(3), it will not be possible to call for all the information prescribed under rule 10D including supporting information and documents mentioned in sub-rule (3) in a routine or a casual manner without application of mind as to what specific information is required to achieve the purpose of the Regulations. The information, which has already been furnished by the assessee either in the audit report or in response to notice under section 92CA(2), would be of no use and there is no point in requiring the same information again or require unprescribed information under section 92D(3) and cast additional burden on the assessee. In all such cases, it would no more remain valid notice under section 92D(3) / 271G. Application of mind to find and consideration of material on record and to see what further information on specific point is required, is essential before issuing notice under section 92D(3) to the assessee. The notice is a serious notice, as its non-compliance within the specified time would lead to imposition of penalty which may amount to several crores. It is not a routine notice which can be casually issued calling for any information or all prescribed information. Where the assessee has ‘option’ to select relevant information, it is not a notice under section 92D(3) as ‘option’ and word ‘require’ do not go together. Having regard to the said scheme, the said notice is issued to get information on specified point needed on the facts and circumstances of the case for purposes of determining the ALP. [Para 28]
Penalty under section
271G :
The penalty under section 271G can be imposed on any person who has entered into an international transaction, but fails to furnish information or document as required under sub-section (3) of section 92D. On account of the said default (failure), the defaulter is liable to pay penalty for a sum equal to 2 per cent of the value of international transactions for each such default. Provisions of section 273B overrides section 271G. In other words, no penalty can be imposed for the said failure of the person to furnish documents in time, if such failure is proved to be due to a ‘reasonable cause’. [Para 29.1]
The TPO, in the instant case, issued first notice on 22-9-2005. In para 1 of the notice, he asked the assessee to support and substantiate the computation of ALP in international transactions. This was required by section 92CA(2). As per para No. 2, the TPO further required to furnish information including the balance sheet, profit and loss account, statement of computation of income, audit report, tax report and also, information and documents maintained as prescribed under section 92D, read with rule 10D, without specifying any particular information clause of rule 10D. The said notice was a notice under section 92CA(2), but the TPO, by asking further information, made it a notice under section 92CA(3). Only under above sub-section, the TPO could call for information like balance sheet, P&L account, and audit report, which already stood filed and which were unprescribed. Such unspecific information could not be required under section 92D(3). Why and how information already furnished and could be obtained from Assessing Officer, was required or needed, was not clear from the notice or other material available on record. The notice was issued in a casual manner. The TPO had not examined records of the assessee, nor the nature or details of the international transactions. There was total lack of application of mind as to what information was required in the case. It was a omnibus notice without any regard of unwarranted heavy burden, it was likely to place on the assessee not authorized under section 92D(3). It was an unintelligible notice where all the information and documents maintained under rule 10D were required in addition to the information referred to above. [Para 30]
The second notice issued on similar lines on 13-10-2005 asking for submission of documents by 7-11-2005 did not improve the situation. A third notice dated 8-11-2005 was again issued quoting provision of section 92D and calling upon the assessee to file information and documents latest by 21-11-2005. The said notice also had all infirmities noted in the first notice. [Para 31]
In the light of the discussion in the preceding paras relating to requirement of valid notice under section 92D(3), the notices in question could not be treated as valid and legal to justify application of provision under section 271G and levy of penalty of more than Rs. 40 crores. Those were omnibus notices issued without application of mind and without considering documents already placed by the assessee on record and without consideration as to which of the specific clauses of sub-rule (1) or other sub-rules of rule 10D was attracted or which relevant information was needed in the case. Under section 92D(3), the Assessing Officer or the Commissioner (Appeals) is authorized to require prescribed information, but in the instant case, both prescribed and unprescribed information, like balance sheet, profit and loss account, computation of income, etc., was also required to be furnished from the assessee before the assessee could file evidence under section 92CA(2). Not only primary documents necessary to support the computation of ALP of the assessee, but also supporting documents detailed in sub-rule (3) of rule 10D were required to be furnished without considering which supporting documents out of several mentioned in various clauses of the said sub-rule were available with the assessee. The burden of selection/relevancy of clauses applicable was shifted to the assessee. The notice only increased burden of the assessee and confused the noticee. The said notices issued without application of mind and without considering relevancy and requirement of all the prescribed information and documents under rule 10D vitiated the legality of the notices. The said notices could not be treated as proper and legal notices in terms of section 92D(3). The failure, therefore, of the assessee to comply with such notices in time could not justify levy of penalty under section 271G. The notice being illegal, question of levy of penalty did not arise. [Para 32]
Therefore, the three notices issued by the TPO could not be treated as valid notices issued in terms of section 92D(3) and, therefore, did not attract penalty provisions of section 271G. [Para 34]
The TPO’s letter dated 12-12-2005, after considering documents filed by the assessee, pointed out certain defects in the comparative uncontrolled price method employed by the assessee without any benchmark. Likewise, TNMM method used was stated to be without providing documents used as comparable nor the functional details of comparables was provided. Such like defects were pointed out. The said notice relating to specific defects and calling for their rectification could be treated as a notice under section 92D(3), although not so labelled by the Assessing Officer. However, admittedly, before the end of December, 2005, all documents and information were furnished by the assessee. So, there was no default in not submitting the documents and information within the prescribed time to attract the provisions of section 271G. Therefore, on facts, there was no justification in the levy of penalty in question. [Para 35]
Further, there was substance in the arguments of the assessee that not only notices were vague, non-specific and showed lack of application of mind, even the show-cause notice issued under section 271G suffered from the same defect. No specific clause of the rule or detail of the international transaction relating to which default was committed, were stated in the show-cause notice issued by the Assessing Officer. The notices issued were prima facie illegal and bad in law. As penalty of 2 per cent under section 271G was imposable in respect of international transaction, it was necessary to specify in the show-cause notice under section 271G, the international transactions or the documents/information with reference to which the assessee committed the default by failing to furnish the requisite information in time. That would enable him to file a proper reply in defence. Without details of default, no adequate reply could be furnished. The contention of revenue, that specific clauses of rule 10D(1), under which information was not furnished within time and default was committed, were mentioned in the penalty order, was of no avail. The mention of said detail in the order was of no use. The details were required to be mentioned in the show-cause notice so as to afford reasonable and adequate opportunity to the assessee to meet out the case and serve the purpose of the notice. For that defect also, the penalty proceedings were to be vitiated and liable to be cancelled. [Para 36]
The assessee
had explained that small delay in the furnishing of information within the
prescribed time took place on account of a reasonable cause as its Financial
Controller had gone out of town and was not available to furnish information which
was voluminous and highly technical in nature. Besides, the assessee was not
clear as to what was required to be furnished in support of determined ALP and
other supporting information mentioned in sub-rule (3) of rule 10D. In the
above and other circumstances duly given in reply to the show-cause notice, the
assessee had claimed that delay, if any, was on account of a reasonable cause
and, therefore, no penalty was exigible. The assessee had filed information bona
fidely according to its understanding of the regulations and legal guidance
received by it. The Assessing Officer failed to refute any of the claim and
recorded no finding on the ‘reasonable cause’ pleaded by the assessee. In other
words, it was not held that the delay was without a reasonable cause. The same
position continued unaltered in appellate proceedings before the Commissioner
(Appeals). The case pleaded by the assessee was neither examined nor refuted
before upholding the levy of penalty. The revenue tried to challenge the said
argument of the assessee. However, on facts, the arguments of the assessee were
well taken. The provision of section 271G is to be read along with provision of
section 273B. The penalty under section 271G can be imposed only if the default
is held to be proved to be without reasonable cause. Once a reasonable cause
for delay is pleaded, then it has to be examined in accordance with law. In the
instant case, no attempt had been made by the revenue to look into, examine or
refute the claim of reasonable cause put forth by the assessee. The case,
therefore, could not be taken to have been rejected. The penalty had been
imposed without considering application of section 273B which overrides
provisions of section 271G. The instant case was covered under section 273B.
The delay, if any, in the submission of information or documents within the
prescribed time was due to a reasonable cause. Therefore, the penalty was not
sustainable on account of that ground also. Besides, penalty of
Rs. 40,46,41,376 for mere delay of about a month or so in the submission of
information and documents assuming entire case of revenue was established, was
imposed on mere technical grounds. Having regard to the settled law that no
penalty for technical or venial default is imposable, there was force in that
alternative argument of the assessee. [Para 37]
The assessee had also vehemently argued that no satisfaction in the case was recorded by the Assessing Officer during the course of assessment proceedings. The said contention could not be accepted as provisions of section 271G are quite different from provisions of section 271(1). Therefore, Commissioner (Appeals) was quite justified in holding that no satisfaction need be recorded before initiating proceedings under section 271G. Apart from that, in the instant case, the TPO had specifically recorded details of the alleged default committed by the assessee in not furnishing information/documents which the TPO thought he was competent to require under section 92D. Therefore, there was no merit in the contention that satisfaction was not recorded in the case, although the penalty was cancelled on some other ground and the said finding did not materially affect the ultimate result of the appeal. There were several other grounds/arguments raised by the parties, but, no useful purpose would be served in dealing with each of those grounds. Therefore, on facts of the case, the penalty imposed was not exigible and the same was to be cancelled. [Para 38]
In the result, the appeal was to be allowed. [Para 39]
CASE REVIEW:
Barium Chemicals Ltd. v. A. J. Rana 1972 AIR SC 591, (para 26) and New Central Jute Mills Co. Ltd. v. Dwijendralal Brahmachari 90 ITR 467 (Cal.) (para 33) followed.