Ita/93/2012 Of M/S.torry Harris Sea Foods (Pvt) Ltd v. The Dy.commissioner Of Income Tax, Alappuzha

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON FRIDAY, THE 18TH DAY OF JANUARY 2019 / 28TH POUSHA, 1940 ITA. No.93 of 2012 AGAINST THE ORDER IN ITA NO.198/2010 OF THE INCOME TAX APPELLATETRIBUNAL, COCHIN BENCH DATED 20.01.2012 APPELLANT/RESPONDENT/ASSESSEE: M/S.TORRY HARRIS SEA FOODS (PVT) LTD.9/572, THIRUMALA WARD, CCNB ROAD, ALAPPUZHA, REPRESENTED BY S. LALJI, MANAGING DIRECTOR. BY ADVS.SRI.T.M.SREEDHARAN (SR.)SMT.BOBY M.SEKHARSMT.NISHA JOHNSRI.V.P.NARAYANAN RESPONDENT/APPELLANT/REVENUE: THE DY.COMMISSIONER OF INCOME TAX, CIRCLE-1, ALAPPUZHA. BY ADVS.RAJA KANNAN AS AMICUS CURIESRI.JOSE JOSEPH, SC, FOR INCOME TAXSRI.P.K.R.MENON, SENIOR COUNSEL, GOI(TAXES)SRI.NAVANEETH N. NATH THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 18.01.2019,THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ITA. No.93 of 2012 JUDGMENT K. Vinod Chandran, J. A very interesting question arises in the above case, as to the application of theproviso to Section 92C(2) of the Income Tax Act,1961 [for brevity, 'the Act'] in so far as theoption available to an assessee in the fixationof the arms length price [ALP for brevity] underChapter X. 2. On facts, it need only be statedthat the assessee had an internationaltransaction as defined under Section 92B with anassociated enterprise as defined under Section92A of the Act. The price invoiced by theassessee was Rs.37,39,96,538/-. The AssessingOfficer [A.O], referred it under Section 92CA ofthe Act and the Transfer Pricing Officer determined the ALP at Rs.38,05,97,081/-. Thedifference was Rs.66,00,543/-, which was below ITA. No.93 of 2012 5%, ie. the ALP determined exceeded the invoiceprice only by less than 5%. The provision stoodamended by Finance Act, 2009 w.e.f 01.10 2009,by introduction of two provisos. The secondproviso permits adoption of the price at whichthe international transaction was undertaken ifthe variation between the invoiced price and theALP does not exceed by a stipulated percentage.At the time of the subject amendment, thepercentage was to be notified by the CentralGovernment and by Finance Act, 2011 it wasspecified as 5% and now at 3%. However theamendment was only prospective and we have tolook at the provisions as it existed in thesubject assessment year, ie: 2005-06. 3. Section 92B(2) of the Act and theproviso therein as it existed and relevant forthe subject assessment year does not providesuch a computation or a deeming fiction as now ITA. No.93 of 2012 available in the second proviso. It merelyprovided for a determination of ALP by theappropriate method and the option of theassessee is only when more than one price isdetermined by the most appropriate method. Theproviso contemplated adoption of the arithmeticmean in such cases and an option was given tothe assessee to seek adoption as ALP, a pricewhich does not vary from the arithmetical meanin excess of 5%. The option so provided was toselect one of the prices arrived at by the mostappropriate method and not the invoiced price;the price at which the assessee asserted thetransaction to have been undertaken. Theprovision applicable for the subject year washence substantially different. 4. Smt.Nisha John, the learned Counselfor the assessee, points out that the CentralBoard of Direct Taxes has also issued a ITA. No.93 of 2012 4. Smt.Nisha John, the learned Counselfor the assessee, points out that the CentralBoard of Direct Taxes has also issued a ITA. No.93 of 2012 Circular bearing No.12/2001 dated 23.08.2001,wherein there is a specific restriction on theAssessing Officer to make any adjustments to theALP determined by the tax payer, if such priceis up to 5% less or up to 5% more, than the ALPdetermined by the A.O or the TPO. When the A.O.himself or the TPO on a reference, determinesthe ALP, necessarily the mitigation offered bythe CBDT has to be applied with full force. Inthe present case, from the facts noticed, it isvery clear that the ALP determined was not inexcess of the invoice price by more than 5%.Reference is also made to the subsequentamendments made, introducing two provisos, whichaccording to the Counsel, is in tandem with theCircular issued by the CBDT and later adopted inthe statue itself. The amendment isclarificatory in nature is the submission of thelearned Counsel for the assessee. In suchcircumstances, there is no warrant for the ITA. No.93 of 2012 enhanced demand made by the A.O based on the ALPdetermined by the TPO is the argument. 5. Considering the intricacies in thematter, we appointed Sri.Raja Kannan as theAmicus Curiae. Sri.Raja Kannan points out thatthe proviso as it was introduced by Finance Act,2001 with effect from 01.04.2002 did not providefor any option to the assessee. It only providedfor determining the ALP applying the arithmeticmean, in case of there being more than one pricedetermined by the most appropriate method.However, by Finance Act, 2002, again with effectfrom 01.04.2002, the proviso was amendedbringing in the option, which, according to him,does not offer any mitigation to the assessee onthe facts of this case, since there is not morethan one price determined in so far as theinternational transaction, on which ALP wasdetermined by the TPO. However, the CBDT ITA. No.93 of 2012 Circular has provided a mitigation, which has tobe applied with its full force. We in fact hadraised a specific query at the last date ofhearing as to whether the CBDT could havebrought in such mitigation, quite contrary tothe provision of law. 6. Reliance was placed on a judgment ofthe Hon'ble Supreme Court in UCO Bank Vs.Commissioner of Income Tax [(1999) 237 ITR 889.Therein the question arising under the I.T Actwas whether the interest accruing in bad anddoubtful debts could be taxed as an income.There was a Circular issued in the year 1952 bythe CBDT, which provided that interest accruedto a money lender on bad and doubtful debts neednot be included in the assessee's taxableincome. However, the Kerala High Court expresseda contrary view in the case of State Bank ofTravancore v. Commissioner of Income Tax [1977 110 ITR 336]and in such circumstance,the Circular of 1952 was withdrawn by a Circularof 1978. It was clarified that the interest thuscredited to doubtful accounts, even ifmaintained as suspense accounts would beincludable in the taxable income. Later, in theyear 1984, the CBDT brought out a furtherCircular, specifying that such interest creditedto bad and doubtful debts would be included inthe taxable income only for three consecutiveyears; in which there is no recovery effected.After that, for the subsequent years, theinterest even though accruing in the doubtfuldebts would not be taxable as income. It wasalso clarified that, if there is any recoveryafter the three year period, then only thoseamounts actually recovered would be taxable. Thequestion arose as to whether the CBDT had thepower to vary the provisions of the statute and ITA. No.93 of 2012 offer a mitigation in excess of that provided inthe statute. The Hon'ble Supreme Court heldthat: “The Board thus has power, interalia, to tone down the rigour of the lawand ensure a fair enforcement of its ITA. No.93 of 2012 offer a mitigation in excess of that provided inthe statute. The Hon'ble Supreme Court heldthat: “The Board thus has power, interalia, to tone down the rigour of the lawand ensure a fair enforcement of its provisions, by issuing circulars inexercise of its statutory powers undersection 119 of the Income-Tax Act whichare binding on the authorities in theadministration of the Act.”(sic) 7. We immediately notice that UCO Bank [supra] is no more good law for reason of thedecision of a Constitution Bench of the Hon'bleSupreme Court in Commissioner of CentralExcise v. Ratan Melting & Wire Industries[2008 (4) KLT 607 (SC)]. The larger benchconsidering the issue on a reference held thatthe courts or Tribunals, before whom a questionof interpretation of a particular provision is raised, cannot rely on the Circulars issued bythe Board, which is contrary to the declarationmade by a Constitutional Court. It was also heldthat a Circular, which is contrary to thestatutory provision, has no existence in law(para6). 8. The learned Senior Counsel,Government of India [Taxes] Sri.P.K.R. Menon,assisted by Sri.Navneeth S. Nath, takes usthrough the amendments brought in to theproviso. It is the argument of the learnedSenior Counsel that the case of the assessee hasto be decided on the basis of the proviso as itexisted then. The proviso was first introducedin the year 2001, wherein it was only providedthat when more than one price is determined bythe most appropriate method, then the ALP has tobe taken on the average of such prices. Thisproviso was brought in with effect from ITA. No.93 of 2012 01.04.2002. Circular No.12 of 2001 was dated23.08.2001 in the financial year 2001-2002[relevant to the assessment year 2002-2003].Reference is made to the 2[nd] paragraph of theCircular to specifically point out that theCircular was in so far as the Rules being framedby the Board, only after the Finance Bill havingreceived assent of the legislature and notifiedon 21.08.2001. Hence a mitigation was provided,in the case of assessees who had failed tomaintain the prescribed information or documentsin respect of the international transactionsentered into during the period 01.04.2001 to31.08.2001. The Rules having been brought inonly on 21.08.2001, there was no possibility ofthe assessee being apprised of the requirementsprescribed under the provisions; whichprescription came long after the commencement ofthe relevant financial year. True, there wasalso a mitigation provided insofar as the ALP ITA. No.93 of 2012 determined by the tax payer being in variationof 5% of the price for which the transaction wasundertaken. However, the same applies only tothe proviso that was brought in by Finance Act2001 with effect from 01.04.2002. The proviso sobrought in by Finance Act, 2001 was neverenforced since Finance Act, 2002 amended theproviso again with effect from 01.04.2002itself. Hence, the mitigation provided insofaras the ALP being determined with reference tothe invoiced price of the assessee does not atall apply. The Circular was not with respect tothe amended proviso, brought in by FinanceAct,2002; which was also made applicable from01.04.2002, is the compelling argument. 9. We have to first notice theamendments brought in, in the subsequent years.Section 92C(2) read as follows, as it existed: “(2) The most appropriate method referred to in sub-section (1) shall beapplied, for determination of arm's lengthprice, in the manner as may be prescribed”. A proviso was added by Finance Act, 2001, witheffect from 01.04.2002, which reads as below: “Provided that where more than one pricemay be determined by the most appropriatemethod, the arm's length price shall betaken to be the arithmetical mean of suchprices”. 9. We have to first notice theamendments brought in, in the subsequent years.Section 92C(2) read as follows, as it existed: “(2) The most appropriate method referred to in sub-section (1) shall beapplied, for determination of arm's lengthprice, in the manner as may be prescribed”. A proviso was added by Finance Act, 2001, witheffect from 01.04.2002, which reads as below: “Provided that where more than one pricemay be determined by the most appropriatemethod, the arm's length price shall betaken to be the arithmetical mean of suchprices”. The proviso was substituted by Finance Act,2002, again with effect from 01.04.2002, asfollows: “Provided that where more than one priceis determined by the most appropriatemethod, the arm's length price shall betaken to be the arithmetical mean of suchprices, or, at the option of the assessee, aprice which may vary from the arithmeticalmean by an amount not exceeding five percent of such arithmetical mean”. 10. The proviso applicable for theassessment year is that brought in by FinanceAct, 2002 with effect from 01.04.2002. Theproviso introduced by Finance Act, 2001 did nothave an option which the Board provided in theCircular. Even if the said option as provided inthe Circular is taken as a mitigation of therigour of the provision; it is to be noticedthat the proviso without the option never cameinto force; the same having been substitutedwith the proviso by Finance Act, 2002; which hadan option but not in tune with that provided inthe Circular of the Board. When the proviso asbrought in by the Finance Act, 2002 came intoeffect, the Circular, to the extent of theoption granted, stood contrary to the statutoryprovision. 11. As was rightly noticed by the Tribunal, there is a peculiar circumstance ITA. No.93 of 2012 insofar as the Finance Act, 2001 havingoriginally inserted Section 92C along with aproviso with effect from 01.04.2002, whichproviso, however, was substituted by FinanceAct, 2002; again with effect from 01.04.2002.The proviso as introduced by Finance Act, 2001,hence, is not in operation for any period.Circular No.12 of 2001, issued to explain theamendments made by the Amendment Act, 2001 hasno effect. We agree with the said finding of theTribunal and add that the Circular can haveeffect only insofar as the mitigation providedto an assessee who has not been apprised of therequirements of the maintenance of prescribedinformation or documents in respect oftransactions between 01.04.2001 and 31.08.2001.This is for reason of the Rules being notifiedin the midst of the year. 13. Computation of ALP as provided under Section 92C can be under any of themethods enumerated under clauses (a) to (f) ofsub-section (1), having regard to the nature oftransaction or class of transaction or class ofassociated persons or functions performed bysuch other persons or such other relevantfactors as the Board may prescribe. In thepresent case, there is only one ALP determinedby the TPO in accordance with one of theappropriatemethods,being'comparableuncontrolled price method' as seen from clause(a) of Section 92C(1). The proviso, according tous, would enable an option only in the contextof there being a determination of more than oneprice by the most appropriate method. In thatcontext it does not offer an option to comparethe ALP determined with reference to theinvoiced price, being the price at which thetransaction is undertaken. When there are morethan one price determined then the average has to be taken and the assessee has an option toadopt one of the prices determined by the A.O orthe TPO; which does not vary by an amount inexcess of 5% from the arithmetical mean and notfrom the invoiced price. There is absolutely noreference to the invoiced price insofar as theoption made available to the assessee by theproviso as it existed from 01.04.2002,introduced by Finance Act, 2002 relevant to thesubject assessment year. 14. We also have to notice thatsubsequently sub-section (2A) was was broughtinto Section 92C by Finance Act, 2012, whichreads as follows: “(2A) Where the first proviso to sub-section(2) as it stood before its amendment by thefinance (No.2) Act, 2009 (33 of 2009), isapplicable in respect of an internationaltransaction for an assessment year and thevariation between the arithmetical meanreferred to in the said proviso and the price at which such transaction has actually beenundertaken exceeds five per cent of thearithmetical mean, then, the assessee shallnot be entitled to exercise the option asreferred to in the said proviso”. 15. This demolishes the contention of the assessee that the amendments in 2009 areclarificatory in nature. Hence, the statute, forthe relevant year, did not at all provide anacceptance of the invoiced price on any countand not at all on the ground that the differencebetween the invoiced price and the ALPdetermined not exceeding 5%. The mitigationprovided by the CBDT is on the provisointroduced by the Finance Act, 2001. The samecannot be applied to the proviso introduced byway of substitution, by the Finance Act, 2002.The substituted proviso, which applied from01.04.2002 erased the earlier proviso from thestatute totally. It granted an option to the ITA. No.93 of 2012 assessee; but only insofar as adopting one ofthe prices from which the average price isdetermined; that too in cases of more than oneprice being determined under the mostappropriate method. In such circumstances, weanswer the question of law framed in favour ofthe Revenue and against the assessee. We affirmthe order of the Appellate Tribunal. The appeal stands rejected. Parties areleft to suffer their respective costs. Sd/- K. VINOD CHANDRAN JUDGE Sd/- sp/30/01/19 ASHOK MENON JUDGE APPENDIX PETITIONER'S EXHIBITS: ANNEXURE-ATRUE COPY OF THE ASSESSMENT ORDER DATED 12/12/2008 ISSUED BY THE RESPONDENT.ANNEXURE-BTRUE COPY OF THE ORDER DATED 03/11/2009 IN ITA NO.30/ALP/08-09 PASSED BY THE COMMISSIONER OF INCOME TAX (APPEALS)-1, THIRUVANANTHAPURAM. ANNEXURE-CCERTIFIED COPY OF THE ORDER DATED 20/01/2012 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH, COCHIN, IN ITA NO.198/COCH/2010 WITH TYPED COPY.