QUESTION
State the consequences that would follow, if the Assessing Officer makes adjustment to arm's length price in international transactions of the assessee resulting in increase in taxable income.
What are the remedies available to the assessee to dispute such adjustment?
ANSWER
In case the Assessing Officer makes adjustment to arm's length price in an international transaction it will results in increase in taxable income of the assesse.
Further, the following consequences shall follow:-
(a) No deduction under section 10AA or Chapter VI-A of Income tax Act shall be allowed from the income so increased.
(b) No corresponding adjustment would be made to the total income of the other associated enterprise (in respect of payment made by the assessee from which tax has been deducted or is deductible at source) on account of increase in the total income of the assessee on the basis of the arm's length price so recomputed.
The remedies available to the assessee to dispute such an adjustment are:-
1) In case the assessee is an eligible assessee under section 144C of Income tax Act he can file his objections to the variation made in the income within 30 days [of the receipt of draft order by him to the Dispute Resolution Panel and Assessing Officer. Appeal against the order of the Assessing Officer in pursuance of the directions of the Dispute Resolution Panel can be made to the Income-tax Appellate Tribunal.
2) In any other case, he can file an appeal under section 246A of the Act to the Commissioner (Appeals) against the order of the Assessing Officer within 30 days of the date of service of notice of demand.
3) The assessee can opt to file an application for revision of order of the Assessing Officer under section 264 within one year from the date on which the order sought to be revised is communicated, provided the time limit for appeal to the Commissioner (Appeals) or the Income-tax Appellate Tribunal has expired or the assessee has waived the right of such an appeal. The eligibility conditions stipulated in section 264 should be fulfilled.
LET'S CONSIDER APPLICABLE PROVISIONS
SECTION 10AA OF THE INCOME TAX ACT, 1961
Section 10AA is a provision under the Income Tax Act which allows taxpayers to take deductions for businesses which are established in Special Economic Zones (SEZ). In April 2000, with a view to attracting foreign investment in India, the Government announced that tax concessions would be provided for entrepreneurs who set up the specified businesses in Special Economic Zones. Accordingly, initially, SEZs were instituted to function under the provisions of the Foreign Trade Policy. However, gradually, the SEZ Act and SEZ rules were formed and made effective from the year 2006. Income tax benefit or Section 10AA deduction is available to SEZ and the corresponding provisions are contained under section 10AA of the Income Tax Act. The present article highlights the various conditions for claiming the deduction under Section 10AA, the amount of income tax benefit/deduction available under the section, and other salient features of the section.
ELIGIBILITY FOR SECTION 10AA DEDUCTION
In order to claim deduction under section 10AA of the Income Tax Act, SEZ units are required to satisfy the following conditions:
1. The entrepreneur should be covered within the provisions of section 2 (j) of the Special Economic Zone Act, 2005;
2. SEZ unit should have commenced its manufacturing activity or provision of service, as the case may be, during the previous year relevant to any assessment year commencing on or after 1st April 2006;
3. SEZ unit is not formed by any splitting up, or the reconstruction of the business that is already in existence;
4. SEZ unit is not formed by any transfer of plant or machinery, previously used for any purpose, to a new business; and
5. Units who have already enjoyed the benefit of deduction under section 10A of the Income Tax Act for a continuous period of 10 years are not eligible to claim deduction under Section 10AA of the Act.
AMOUNT OF DEDUCTION
The amount of deduction available under this section shall be as follows:
- 100% of export profit is eligible for the deduction for the first five years.
- 50% of export profit is eligible for the deduction for the next five years.
- •Amount not exceeding 50% of export profit is eligible for the deduction for the next five years.
The condition for allowance of the deduction is that the same has to be debited from the Statement of Profit and Loss and credited to ‘Special Economic Zone Reinvestment Reserve Account'. Also, Section 10AA deduction is allowable from the assessment year relevant to the previous year in which the SEZ unit commences its manufacturing process or commences provision of service, as the case may be.
SPECIAL ECONOMIC ZONE REINVESTMENT RESERVE ACCOUNT
There are certain conditions to be followed by the assessee, in order to claim a deduction of the last 5 years (i.e. amount not exceeding 50% of the export profit), as detailed above. The conditions for utilization of amount credited in ‘Special Economic Zon Reinvestment Reserve Account' are summarized hereunder:
1. The amount credited to ‘Special Economic Zone Reinvestment Reserve Account' is required to be utilized only for the purpose of purchase of plant or machinery. Such newly acquired plant or machinery should be first put to use before the expiry of 3 years following the previous year in which the said reserve has been created.
2. Further, the amount credited to ‘Special Economic Zone Reinvestment Reserve Account', until the acquisition of the plant or machinery as mentioned in point 1 above, can be used for the purpose of the business of the undertaking. However, the same cannot be used for distribution by way of dividend or profits or for remittance of profits outside India or for creation of any assets outside India.
The following are the consequence in case the reserve fund is not used as per the directions of the Income Tax Act:
The amount credited to ‘Special Economic Zone Reinvestment Reserve Account' would be deemed to be profitable in the year immediately following the period of three years in case the amount is not utilized for the purchase of plant or machinery as directed. Further, the amount credited to ‘Special Economic Zone Reinvestment Reserve Account' would be deemed to be profitable in the year in which the amount has been utilized for a purpose other than directed.
SECTION 263 of the Income Tax Act, 1961 Revision of orders prejudicial to revenue
(1) The Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer or the Transfer Pricing Officer, as the case may be, is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including,-
(i) an order enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment; or
(ii) an order modifying the order under section 92CA; or
(iii) an order cancelling the order under section 92CA and directing a fresh order under the said section.
Explanation 1.- For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,-
(a) an order passed on or before or after the 1st day of June, 1988] by the Assessing Officer or the Transfer Pricing Officer, as the case may be, shall include-
(i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A;
(ii) an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer or the Transfer Pricing Officer, as the case may be, conferred on, or assigned to, him under the orders or directions issued by the Board or by the Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General or Principal Commissioner or Commissioner authorised by the Board in this behalf under section 120;
(b) "record shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner;
(c) where any order referred to in this sub-section and passed by the Assessing Officer or the Transfer Pricing Officer, as the case may be, had been the subject matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the Principal Commissioner or Commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal.
Explanation 2.- For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer or the Transfer Pricing Officer, as the case may be, shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner,-
(a) the order is passed without making inquiries or verification which should have been made;
(b) the order is passed allowing any relief without inquiring into the claim;
(c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or
(d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.
Explanation 3.- For the purposes of this section, "Transfer Pricing Officer" shall have the same meaning as assigned to it in the Explanation to section 92CA.
(2) No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed.
(3) Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, National Tax Tribunal, the High Court or the Supreme Court.
Explanation.- In computing the period of limitation for the purposes of sub-section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded.
SECTION 264 OF INCOME TAX ACT "REVISION OF OTHER ORDERS"
(1) In the case of any order other than an order to which section 263 applies passed by an authority subordinate to him, the Principal 9b[Chief Commissioner or Chief Commissioner or Principal] Commissioner or Commissioner may, either of his own motion or on an application by the assessee for revision, call for the record of any proceeding under this Act in which any such order has been passed and may make such inquiry or cause such inquiry to be made and, subject to the provisions of this Act, may pass such order thereon, not being an order prejudicial to the assessee, as he thinks fit.
(2) The Principal Chief Commissioner or Chief Commissioner or Principal] Commissioner or Commissioner shall not of his own motion revise any order under this section if the order has been made more than one year previously.
(3) In the case of an application for revision under this section by the assessee, the application must be made within one year from the date on which the order in question was communicated to him or the date on which he otherwise came to know of it, whichever is earlier :
Provided that the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner may, if he is satisfied that the assessee was prevented by sufficient cause from making the application within that period, admit an application made after the expiry of that period.
(4) The Principal Chief Commissioner or Chief Commissioner or Principal] Commissioner or Commissioner shall not revise any order under this section in the following cases-
(a) where an appeal against the order lies to the Deputy Commissioner (Appeals) or to the Commissioner (Appeals) or to the Appellate Tribunal but has not been made and the time within which such appeal may be made has not expired, or, in the case of an appeal to the Commissioner (Appeals) or to the Appellate Tribunal, the assessee has not waived his right of appeal; or
(b) where the order is pending on an appeal before the Deputy Commissioner (Appeals); or
(c) where the order has been made the subject of an appeal to the Commissioner (Appeals) or to the Appellate Tribunal.
(5) Every application by an assessee for revision under this section shall be accompanied by a fee of five hundred rupees.
(6) On every application by an assessee for revision under this sub-section, made on or after the 1st day of October, 1998, an order shall be passed within one year from the end of the financial year in which such application is made by the assessee for revision.
Explanation.-In computing the period of limitation for the purposes of this sub-section, the time taken in giving an opportunity to the assessee to be re-heard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded.
(7) Notwithstanding anything contained in sub-section (6), an order in revision under sub-section (6) may be passed at any time in consequence of or to give effect to any finding or direction contained in an order of the Appellate Tribunal, National Tax Tribunal, the High Court or the Supreme Court.
Explanation 1.-An order by the Principal 9b[Chief Commissioner or Chief Commissioner or Principal] Commissioner or Commissioner declining to interfere shall, for the purposes of this section, be deemed not to be an order prejudicial to the assessee.
Explanation 2.-For the purposes of this section, the Deputy Commissioner (Appeals) shall be deemed to be an authority subordinate to the Principal 9b[Chief Commissioner or Chief Commissioner or Principal] Commissioner or Commissioner.
SECTION 264A of the Income Tax Act, 1961 "Faceless revision of orders"
(1) The Central Government may make a scheme, by notification in the Official Gazette, for the purposes of revision of orders under section 263 or section 264, so as to impart greater efficiency, transparency and accountability by-
(a) eliminating the interface between the income-tax authority and the assessee or any other person to the extent technologically feasible;
(b) optimizing utilization of the resources through economies of scale and functional specialization;
(c) introducing a team-based revision of orders, with dynamic jurisdiction.
(2) The Central Government may, for the purpose of giving effect to the scheme made under sub-section (1), by notification in the Official Gazette, direct that any of the provisions of this Act shall not apply or shall apply with such exceptions, modifications and adaptations as may be specified in the notification:
Provided that no direction shall be issued after the 31st day of March, 2022.
(3) Every notification issued under sub-section (1) and sub-section (2) shall, as soon as may be after the notification is issued, be laid before each House of Parliament.
CAclubindia
