Underwater Services Company Ltd v. Deputy Commissioner Of Income Tax,Central Circle - 5(3) & Ors

(Private Secretary) IN THE HIGH COURT OF JUDICATURE AT BOMBAYO.O.C.J. WRIT PETITION NO. 3364 OF 2018 Underwater Services Company Ltd..Petitioner Versus Deputy Commissioner of Income Tax,Central Circle - 5(3) & Ors...Respondents ................... V. Sridharan, Sr. Counsel a/w Mr. S. Sriram, Mr. Mayank Thosari/by B.V. Jhavaeri for the Petitioner V. Sridharan, Sr. Counsel a/w Mr. S. Sriram, Mr. Mayank Thosari/by B.V. Jhavaeri for the Petitioner Mr. Charanjeet Chanderpal a/w Ms. Namita Shirke and Ms. PragyaChandra for the Respondents Mr. Charanjeet Chanderpal a/w Ms. Namita Shirke and Ms. PragyaChandra for the Respondents ................... CORAM : AKIL KURESHI & B.P. COLABAWALLA, JJ. DATE : FEBRUARY 1, 2019. P.C.: 1.Heard learned counsel for the parties for final disposal of the petition. 2.Petitioner has challenged a notice dated 28.3.2018 issued by respondent No. 1 - Assessing OfÏcer under Section148 of the Income Tax Act, 1961 ("the Act" for short). 3.Brief facts are as under:- (a). The petitioner is a company registered under the Companies Act and is engaged in the business of renderingservices relating to operations and maintenance of SinglePoint Mooring installations on the high seas. For theassessment year 2011-12, the petitioner had filed return ofincome on 30.9.2011 declaring total income of Rs. 4.32 crore(rounded off). The return was taken in scrutiny by theAssessing OfÏcer. He passed the order of assessment underSection 143(3) of the Act on 31.12.2013. In such order, hedetermined the petitioner's total income after makingdisallowance of a sum of Rs. 4.42 crore (rounded off) whichincluded the expenditure incurred under the head 'salespromotion' and 'gift expenses'. (b).To reopen such assessment, the Assessing OfÏcer hasissued the impugned notice. In order to do so, he hadrecorded the following reasons:- "1. M/s. Samson Maritime Limited (SML) is a ship owningcompany and the assessee i.e M/s. Underwater Services Co.Ltd. (USCL) is a service enterprise. O & M contract as well asSingle Point Mooring SPM are been undertaken by USCL.For providing these services, USCL hires charter vessels fromSML, its 100% holding company on day rate charter basis asthe assessee does not own such vessels.company and the assessee i.e M/s. Underwater Services Co.Ltd. (USCL) is a service enterprise. O & M contract as well asSingle Point Mooring SPM are been undertaken by USCL.For providing these services, USCL hires charter vessels fromSML, its 100% holding company on day rate charter basis asthe assessee does not own such vessels. 2.The assessee has filed return of income declaring the totalincome of Rs. 43279942/- on 30.9.2011 and the same wasprocessed u/S. 143(1) of the Act on 13.1.2012.income of Rs. 43279942/- on 30.9.2011 and the same wasprocessed u/S. 143(1) of the Act on 13.1.2012. 2.The assessee has filed return of income declaring the totalincome of Rs. 43279942/- on 30.9.2011 and the same wasprocessed u/S. 143(1) of the Act on 13.1.2012.income of Rs. 43279942/- on 30.9.2011 and the same wasprocessed u/S. 143(1) of the Act on 13.1.2012. 3.In this case, information has been received from DDIT(Inv.),Mumbai vide letter No. DDIT(Inv.) Unit 3(3)/Information-USCL/2017-18 dated 20.3.2017 stating that search action u/S.132 of the IT Act was conducted on the assessee wherein itwas seen that the assessee had not bench marked itstransaction with Associate Enterprises (AE) or ClosingConnected Person. In accordance with the transfer pricingprovision or section 115VI(8) of the I.T. Act and therefore,unreasonable high payments were made with regards to theFair Market Value of hire charges by the assessee to itsholding company M/s. Samson Maritime Ltd (SML).Mumbai vide letter No. DDIT(Inv.) Unit 3(3)/Information-USCL/2017-18 dated 20.3.2017 stating that search action u/S.132 of the IT Act was conducted on the assessee wherein itwas seen that the assessee had not bench marked itstransaction with Associate Enterprises (AE) or ClosingConnected Person. In accordance with the transfer pricingprovision or section 115VI(8) of the I.T. Act and therefore,unreasonable high payments were made with regards to theFair Market Value of hire charges by the assessee to itsholding company M/s. Samson Maritime Ltd (SML). 4. From the information received, it is seen that the assesseehas paid hire charges during FY 2010-11 pertaining to AY2011-12 to its AE Samson Maritime Ltd of Rs. 18,71,03,093/-.It is further observed from the Transfer Pricing Study reportthat SML is treated as a tested party and the OP / OC earnedby SML on charter hire of vessel to USCL is bench marked tothe OP / OC earned on the charter hire of vessel to RelianceIndustries Ltd (RIL) being a not AE. However, it is furtherobserved that the revenue business from RIL to SML is asmall percentage of the total revenue generated by SML,therefore, the comparable and its margin is very small andinconsequential to consider for bench marking and is thereforenot reliable comparable for the entire transaction. In addition to is, it is also seen that Samon Maritime Ltd.indulged in shifting of profit from hands of USCL to SML aseffective rate of tax is much lower in hands of SML ascompared to USCL as per the provisions of section 115VI(8)of the I.T. Act. 5.Further in this case information was also received that theassessee had booked expenditure under the head Gift & salespromotion and victualling expenses amounting to Rs.1413462/-. During the post search proceedings, the assesseehad failed to provide the list of persons to whom the gift werepresented and for the said reason, I have reason to believethat the said expenses as per the provisions of section 37(1)of the I.T. Act are not allowable in the hands of the assesseeand the same has escaped assessment. Further, thevictualling expenses are stated to be incurred in cash.assessee had booked expenditure under the head Gift & salespromotion and victualling expenses amounting to Rs.1413462/-. During the post search proceedings, the assesseehad failed to provide the list of persons to whom the gift werepresented and for the said reason, I have reason to believethat the said expenses as per the provisions of section 37(1)of the I.T. Act are not allowable in the hands of the assesseeand the same has escaped assessment. Further, thevictualling expenses are stated to be incurred in cash. 6.As there is failure on the part of the assessee to disclose fullyand truly all material facts necessary for its assessment, theundersigned had reason to believe that the income chargeableto tax amounting to Rs. 18,85,16,555/- has escapedassessment for A.Y. 2011-12, within the meaning of section147 of the I.T. Act, 1961.and truly all material facts necessary for its assessment, theundersigned had reason to believe that the income chargeableto tax amounting to Rs. 18,85,16,555/- has escapedassessment for A.Y. 2011-12, within the meaning of section147 of the I.T. Act, 1961. Provisions for issuance of notice u/s. 148 as per the provisionsof Sec. 151(2) of the I.T. Act, 1961 is solicited."of Sec. 151(2) of the I.T. Act, 1961 is solicited." (c).Upon being supplied such reasons, the petitioner raisedobjections to the notice of reopening of assessment on25.10.2018. Such objections were rejected by the AssessingOfÏcer by order dated 19.11.2018. Hence, the petition. 4.Taking us to the reasons recorded by the AssessingOfÏcer, learned counsel for the petitioner pointed out thatthe reasons cite two grounds for reopening the assessment.First is with respect to the Arm's Length Price of the transaction entered into by the petitioner with its AssociatedEnterprise ("AE" for short) namely one Samson MaritimeLimited (hereinafter referred to as 'Samson') alleging that inthe process, the assessee had indulged in shifting of itsprofits to said Samson as effective rate of tax is much lowerin the hands of Samson. The second ground sought to bepressed in service by the Assessing OfÏcer is of gift andsales promotion expenses amounting to Rs. 14.13 lacs(rounded off). 5.Learned counsel submitted that with respect to the firstground, the issue was minutely examined by the AssessingOfÏcer during the original scrutiny assessment. The transferpricing provisions were invoked and applied. The assesseehad made representation why the transaction did not lead toany shifting of profit by the assessee to its AE. Only uponbeing satisfied by said explanation that the Assessing OfÏcerpassed the order of assessment making no disallowance oradditions on this ground. Learned counsel submitted thatthere was no additional material found during the searchwhich would in any manner show that the disclosures made by the assessee during the original scrutiny assessment wereincorrect. He, therefore, submits that the issue which wasscrutinized could not have been reopened that too by issuingnotice beyond the period of four years from the end ofrelevant assessment year. 6.On the question of disallowance of expenditure towardsgift items, the learned counsel for the petitioner submittedthat the petitioner had voluntarily reduced the expenditureby 50% and the remaining 50% was disallowed in thescrutiny assessment. The petitioner had challenged saiddisallowance before the Commissioner (Appeals) and has infact succeeded in such appeal. Learned counsel, therefore,submitted that on the ground of merger, such an issue couldhave been raised by the Assessing OfÏcer in the notice ofreopening of assessment. 7.Learned counsel for the petitioner pointed out that inthe reasons recorded, the Assessing OfÏcer has stated thatthe return filed by the petitioner was accepted withoutscrutiny under Section 143(1) of the Act. It was on the basis of such reasons that the sanction for reopening ofassessment was granted. The Assessing OfÏcer as theauthority recording the reasons and the SanctioningAuthority completely misdirected themselves recording theincorrect factual position namely that this was a case inwhich no scrutiny assessment had been undertaken.According to the learned counsel, this would demonstratetotal non application of mind on the part of the AssessingOfÏcer and the Sanctioning Authority. 7.Learned counsel for the petitioner pointed out that inthe reasons recorded, the Assessing OfÏcer has stated thatthe return filed by the petitioner was accepted withoutscrutiny under Section 143(1) of the Act. It was on the basis of such reasons that the sanction for reopening ofassessment was granted. The Assessing OfÏcer as theauthority recording the reasons and the SanctioningAuthority completely misdirected themselves recording theincorrect factual position namely that this was a case inwhich no scrutiny assessment had been undertaken.According to the learned counsel, this would demonstratetotal non application of mind on the part of the AssessingOfÏcer and the Sanctioning Authority. 8.On the other hand, learned counsel Mr. Chanderpalopposed the petition contenting that it was during the searchoperation that the petitioner's modus operandi oftransferring its profit to its AE came to light. Merely becausethe petitioner had supplied the entries and documents andwhich were also examined by the Assessing OfÏcer, wouldnot preclude him from relying upon the material collected bythe investigation wing during the search to reopen theassessment. He submitted that mere disclosures in thereturn and during the assessment would not prevent theAssessing OfÏcer from reopening the assessment if it is found that such disclosures were incorrect. 9.As noted, the reasons recorded by the Assessing OfÏcercites two grounds for reopening the assessment. Withrespect to the action of the assessee to transfer its profit toits AE, the reasons refer to the search operation carried outagainst the assessee. However, the reasons, nowhere eithercontain or cite any material found during such search whichwould show that the disclosures made by the assesseeduring the original assessment proceedings were incorrect.In other words, the Assessing OfÏcer was merely proceedingon the basis of the documents already on record. This is,therefore, not a case where after completion of assessment, the Departmental Authorities came in possession of new oradditional material prima facie establishing that thedeclarations were not true and full. It is undoubtedly true ascanvassed by the learned counsel for the respondent thateven in case where the assessment has been completedafter scrutiny and the period of four years lapsed from theend of relevant assessment year, the Revenue could stillopen the assessment if it is shown that the Assessing OfÏcer was in possession of new or additional material suggestingthat the disclosures were not true or full and that this led tothe assessee's income chargeable to tax escapingassessment. This is, however, not a case of that nature. Inthe reasons, there is a mere mention of search operation.There is no indication of any new material found during suchsearch suggesting that disclosures of the assessee werefalse. In plain terms, the Assessing OfÏcer could not haverelied on this ground to reopen the assessment. 10. There is yet another reason why we cannot permit theAssessing OfÏcer to rely on this ground. This closelyoverlaps with the earlier discussion. The Assessing OfÏcerduring the original assessment had examined the entiretransaction of the petitioner with its AE. In response to thequery raised, the petitioner had given detail replies. In onesuch reply dated 26.12.2013, the petitioner inter aliaprovided following information:- "3.Justification for Inter company transaction - Detailed submission is attached herewith.We hope that above will clarify the nature of expenses."submission is attached herewith.We hope that above will clarify the nature of expenses." Along with this letter, the petitioner had annexed a set of submissions. On the issue this is what the petitioner hadrepresented to the Assessing OfÏcer:- "3.Justification for Inter company transaction - Detailed submission is attached herewith.We hope that above will clarify the nature of expenses."submission is attached herewith.We hope that above will clarify the nature of expenses." Along with this letter, the petitioner had annexed a set of submissions. On the issue this is what the petitioner hadrepresented to the Assessing OfÏcer:- "5. It bears mention that SML is covered under tonnage tax schemeunder Chapter XXIG of the Income Tax Act. As per Section115VZB, SML has to demonstrate that it has not entered into anytransaction or arrangement which produces to the tonnage taxcompany more than ordinary profits which might be expected toarise from tonnage tax activities.under Chapter XXIG of the Income Tax Act. As per Section115VZB, SML has to demonstrate that it has not entered into anytransaction or arrangement which produces to the tonnage taxcompany more than ordinary profits which might be expected toarise from tonnage tax activities. This condition has been substantiated by SML in its assessmentproceedings for A Y 2011-12 as manifested in the acceptance ofits tonnage tax income in the assessment framed under Section143(3) of the Act. A copy of the assessment order is enclosedtogether with the copy of the chart of submissions made in thecourse of proceedings of SML together with the copies ofsubmissions made in the earlier years. These facts should also validate the amounts of charter hirecharges paid by the assessee to SML being the counter-reflection of the acceptance of the validity of the very samecharter hire charges earned by SML from the assessee in thecontext of the tonnage tax scheme." 11. It was after such scrutiny that the Assessing OfÏcer passed the order of assessment in which he made noadditions on this ground. In absence of any new oradditional material available with him, any attempt on thepart of the Assessing OfÏcer to disturb such assessment would be based on mere change of opinion and clearlyimpermissible in law. 12. The second ground sought to be raised by theAssessing OfÏcer in the reasons is possible of summarydisposal. The record would show that out of expenditure inquestion, the assessee had disallowed 50% voluntarily. Theremaining 50% was disallowed by the Assessing OfÏcer. Thiswas subject matter of the appeal before the Commissioner.On the ground of merger, this issue could not have beenraised by the Assessing OfÏcer for reopening theassessment. Even otherwise, where the Assessing OfÏcerhimself had disallowed the expenditure in its entirety, we donot understand how he can seek to reassess the expenditurewhich in the original assessment he disallowed in its entirety. 13. For all these reasons, the impugned notice is quashed. 14. The petition is allowed and disposed of accordingly. [ B.P. COLABAWALLA, J. ] [ AKIL KURESHI, J ]