© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
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Reopening completed assessments under Section 153C of the Income-tax Act and making reference to transfer pricing is invalid when no incriminating material found during search

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The Bangalore Bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of The Himalaya Drug Company (the taxpayer) held that

• Assessment proceedings under Section 153C of the Income-tax Act, 1961 (the Act) is quashed for assessments which are already completed and no incriminating material found in search pertaining to transfer pricing;
• The Dispute Resolution Panel (DRP) is empowered to take cognizance of new issues in course of proceedings before it; and
• Upholds the validity of DRP directions, since DRP directions were issued and communicated to the taxpayer within time under Section 144C of the Act

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Reopening completed assessments under Section 153C of the Income-tax Act and making reference to transfer pricing is invalid when no incriminating material found during search

  1. 1. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG FLASH NEWS KPMG IN INDIA Reopening completed assessments under Section 153C of the Income-tax Act and making reference to transfer pricing is invalid when no incriminating material found during search 14 July 2014 Background The Bangalore Bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of The Himalaya Drug Company 1 (the taxpayer) held that  Assessment proceedings under Section 153C of the Income-tax Act, 1961 (the Act) is quashed for assessments which are already completed and no incriminating material found in search pertaining to transfer pricing;  The Dispute Resolution Panel (DRP) is empowered to take cognizance of new issues in course of proceedings before it; and  Upholds the validity of DRP directions, since DRP directions were issued and communicated to taxpayer within time under Section 144C of the Act. ______________ 1 The Himalaya Drug Company v. DCIT (ITA Nos. 1634 to 1639/Bang/2012 dated 13 June 2014) – Taxsutra.com Facts of the case  The taxpayer is engaged in the business of manufacture and sale of herbal pharmaceutical products, personal care products, animal health care products etc.  During assessment proceedings under Section 143(3) for Assessment Year (AY) 2009-10,as per the taxpayer, the Assessing Officer (AO) did not make a reference to Transfer Pricing Officer (TPO) for determination of Arm’s Length Price (ALP) of international transaction. The AO concluded the assessment under Section 143(3) of the Act by disallowing certain expenses and also making a few additions. Aggrieved by the order of the AO, the taxpayer preferred an appeal before the Commissioner of Income-Tax (Appeals) [CIT (A)] and the Tribunal.  In the meantime, the Bangalore Police had seized cash amounting to INR98.5 million from the residence of Sri Hisham Syed Tamiz (Director of the company).
  2. 2. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.  Subsequently, the taxpayer was subjected to proceedings under Section 132A of the Act and a notice under Section 153C of the Act to furnish return for AY 2003-04 to 2008-09 was also served.  During the course of proceedings under Section 153C, the AO made a reference to TPO for determination of ALP of international transactions. The TPO proposed transfer pricing adjustment and DRP confirmed the same.  The DRP also directed TPO to make additional transfer pricing adjustment on advertising, marketing and promotion expenses (AMP expenses) which was not forming part of report under Section 92E of the Act. Aggrieved by the order of the DRP, the taxpayer preferred an appeal before the Tribunal. Taxpayer’s contentions  The taxpayer contended that DRP had failed to issue directions within the period of 9 months from the end of the month in which the draft assessment order is served on the taxpayer.  The taxpayer contended that as per Section 144C (5) read with Section 144C(8) of the Act, the directions of the DRP are meant for guidance of the AO to enable him completion of assessment.  Accordingly, the taxpayer claimed that DRP order was time barred as the directions were issued to AO on 4 September 2012 and the time limit for issuance of directions by DRP had expired on 31 August 2012.  The taxpayer also contended that reference to TPO was not valid as there was no incriminating material found during search which was related to TP for non- abated assessments.  Further, the taxpayer claimed that DRP does not have the powers to issue any direction in respect of AMP expenditure which did not form part of the TPO’s order thereby exceeding its jurisdiction. Tax department’s contentions  The tax department contended that the assessment order was passed pursuant to DRP order under Section 144C of the Act and relied on amendment passed by the Finance Act, 2012.  As per amendment inserted by the Finance Act, 2012, irrespective of the provisions of Section 153 of the Act, the AO is required to pass final assessment order within one month of receipt of DRP directions under Section 144C(13) of the Act. Observations and ruling of the Tribunal  Validity of DRP directions: The Tribunal rejected the contention of the taxpayer observing that there were several hearing which had taken place before 16 August 2012 and therefore, it was possible for DRP to issue directions on 16 August 2012.  The Tribunal held that directions are forwarded to the taxpayer only on principle of natural justice and such issuance of direction does not give rise to any cause of action.  The Tribunal laid emphasises on the expression 'issue' which means to send out, so that the concerned officer is not in a position to tamper or alter the order.  Further, the taxpayer’ s argument that dispatch of DRP direction on the taxpayer is immaterial and what is contemplated under Section 144C of the Act is the issue of directions to AO is "too technical”.  The Tribunal referred to DRP Rules, 2009 and observed that the rules contemplates that the first directions must be issued and later on should be communicated to eligible taxpayer and AO.  Whether the final assessment order passed was barred by limitation? The Tribunal held that assessment order under Section 153C was barred by time limitation as the actual order was passed on 29 October 2012. However, as per Section 153B, the assessment needs to be completed on 31 December 2011.  Validity of reference to TPO: The Tribunal emphasised that the Legislature has brought about single assessment concept in place of dual assessment contemplated under Chapter XIV-B with the introduction of Sections 153A, 153B, 153C and 153D of the Act.  The Tribunal referred to second proviso to section 153A and contemplated that pending assessment during the proceedings under Section 153A or 153C of the Act will abate and only single assessment is to be made both for disclosed and undisclosed income.
  3. 3. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.  The Tribunal observed the following that prior to initiation of proceedings under Section 153C of the Act:  Assessment under Section 143(3) of the Act was completed without making a reference to TPO for Assessment year (AY) 2003-04 and 2004-05;  For AY 2005-06, assessment was completed and taxpayer's appeal to CIT(A) was pending disposal; and  For AY 2006-07, time limit for issue of notice under Section 143(2) of the Act had expired.  Accordingly, the Tribunal observed that the assessments made under Section 153C for the AYs 2003-04 to 2006-07 were invalid as the assessment proceedings for those years had already attained finality and no incriminating material pertaining to transfer pricing adjustment was discovered in search.  Validity of DRP's direction in respect of AMP expenditure: The Tribunal observed that DRP is empowered to take cognizance of any new issue observed during the course of proceedings under Section 144C(8) of the Act. Our comments This ruling has strengthened the proposition that the DRP has power to take cognizance of any new issue observed during the course of proceedings under Section 144C(8) of the Act. It is pertinent to note that assessment under Section 153C of the Act could not be re-opened for the assessments which were completed prior to initiation of search and no incriminating material is found during the search.
  4. 4. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity“ are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. www.kpmg.com/in Ahmedabad Commerce House V, 9th Floor, 902 & 903, Near Vodafone House, Corporate Road, Prahlad Nagar, Ahmedabad – 380 051 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Bengaluru Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Kochi Syama Business Center 3rd Floor, NH By Pass Road, Vytilla, Kochi – 682019 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Kolkata Infinity Benchmark, Plot No. G-1 10th Floor, Block – EP & GP, Sector V Salt Lake City, Kolkata 700 091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010

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