* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on: 12th February, 2014
% Date of Decision: 21st February, 2014
+ W.P. (C) 811/2012
AT & T COMMUNICATION SERVICES INDIA (P) LTD.
..... Petitioner
Through: Mr. Jayant K. Mehta, Advocate.
versus
COMMISSIONER OF INCOME TAX-I &ANR
..... Respondents
Through: Mr. Balbir Singh, Sr. Standing
Counsel with Shri Abhishek
Singh Baghel, Adv.
CORAM:
MR. JUSTICE S. RAVINDRA BHAT
MR. JUSTICE R.V. EASWAR
R.V. EASWAR, J.
1. In the present proceedings, under Article 226 of the Constitution
of India, the petitioner challenges the order dated 26.12.2011 passed by
the Assistant Commissioner of Income Tax, Circle 2(1), C.R. Building,
I.P. Estate, New Delhi, directing a special audit of its accounts under
Section 142(2A) of the Income Tax Act, 1961 for the assessment year
2008-2009.
W.P. (C) No811/2012 Page 1 of 19
2. The petitioner is a wholly owned subsidiary of AT&T
Communication Services International Inc, USA and was incorporated
on 23.04.1996. It is engaged in three business segments, namely; (i)
Market research, administrative support and liaison services; (ii)
Network connectivity services; and (iii) Managed network services. In
respect of the assessment year 2008-2009, the petitioner filed E-return of
income declaring a total income of Rs.6,95,74,835/- on 30.09.2008. A
notice under Section 143(2) of the Act was issued on 06.08.2009, asking
the petitioner to furnish the computation of income and the notes thereto,
copies of the balance sheet, profit and loss account and the notes thereto,
audit report and also to furnish reasons and make disclosures in support
of the various claims made in the return. On 11.01.2010, an enquiry
was initiated by issue of notice under Section 142(1) of the Act and
several explanations were sought with respect to the return of income
and the various claims made by the assessee, and other clarifications.
The notice issued on 12.08.20101, again under Section 142(1), called
upon the petitioner to furnish the details as per the earlier notice dated
11.01.2010 and also required the petitioner to file the audit report along
with balance sheet, profit & loss account and the computation of income.
The petitioner was also directed to file the history of its income tax
W.P. (C) No811/2012 Page 2 of 19
assessments for the past two years together with copies of the assessment
orders. This requirement was complied with by the petitioner on
01.09.2010. On 04.07.2011, the respondent no.2 (Assessing Officer)
issued another notice under Section 142(1) calling upon the petitioner to
furnish, inter alia, copies of the balance sheet, profit & loss account,
computation of income and the audit report for the assessment year
2008-2009. Under cover of a letter dated 12.07.2011, the petitioner
complied with several requirements as directed by the Assessing Officer
by the aforesaid notices. On 14.10.2011, another notice was issued by
the Assessing Officer under Section 142(1), calling upon the petitioner
to submit information in respect of ten points raised by him which
included the names and addresses along with ledger accounts in respect
of the advances from customers as per Schedule "1" and details of
transactions made with related parties along with the valuation of
debtors together with copies of the ledger accounts. By this notice, the
respondent called upon the petitioner to submit the information on
18.10.2011. However, since the notice was received by the petitioner
only on 18.10.2011, it appears that a request was made to the Assessing
Officer to take up the hearing of the case on 19.10.2011, which was
accepted by him.
W.P. (C) No811/2012 Page 3 of 19
3. On 31.10.2011, the petitioner made detailed submissions in
writing before the Assessing Officer through its letter of the said date.
This letter referred to the notices issued by the Assessing Officer under
Section 142(1) and Section 143(2) as well as the hearing which took
place on 19.10.2011. The information was given under various heads.
In paragraph 9 of the said letter, the petitioner referred to the request of
the Assessing Officer on 19.10.2011 to show cause as to why a special
audit under Section 142(2A) of the Act should not be conducted in the
petitioner's case having regard to the nature and complexity in the
financial statements of the petitioner, and then proceeded to make
submissions objecting to the proposal. The objections were made in
some detail; predominantly they were based on the premise that there
was nothing "complex" or "convoluted" in the financial statements of
the petitioner so as to justify the conduct of a special audit, that the
financial statements were duly audited by the statutory auditors after
verification of the books of account and other relevant documents
without any adverse remark or finding and that the transactions entered
into by the petitioner and the income and expenditure in relation thereto
were in the course of normal business operations. The submissions were
sought to be supported by reference to case law.
W.P. (C) No811/2012 Page 4 of 19
4. On 28.11.2011, the Assessing Officer, the respondent no.2 herein,
submitted the terms of reference for special audit in the case of the
petitioner as also in the case of M/s. AT & T Global Network Services
Pvt. Ltd., to the Commissioner of Income Tax, Delhi-1, New Delhi
(Annexure P-19). The terms of reference were actually submitted by the
Additional Commissioner of Income Tax, Range-2, New Delhi through
whom it is required to be submitted by the Assessing Officer. So far as
the petitioner is concerned, the terms of reference for special audit were
as follows:
"(ii) AT&T Communication Services India Pvt. Ltd.
Related party transactions with AT&T Global Network
Services Pvt. Ltd.
. The mode of computation has to be worked out.
(Brief facts: As per Annexure "E")
Opportunity given to the assessee vide Order Sheet entries
dated 19/10.2011 & 14/11/2011 as per provisions of the
Act, to explain its position regarding complexities and
Special Audit. In response to the same, the assessee's
submitted its reply on 31/10/2011 & 16/11/2011
respectively, which is placed on record."
Annexure "E" enclosed to the aforesaid letter of the Additional
CIT was in the following terms:
W.P. (C) No811/2012 Page 5 of 19
"ii) AT&T Communication Services India Pvt. Ltd.
Brief Facts: (Annexure " E")
The related party transactions relates to sale of
Service Income; the Net Income is reported as per debit of
costs as per issue involved in the allocation of costs for
intergroup charges in the case of its sister concern AT&T
Global Network Services Pvt. Ltd. dealt with at point No.1
of this note.
This assessee is an associated party of AT&T Global
Network Services Pvt. Ltd. and is engaged in same of line
of business, hence, both the assesses are referred together
for Special Audit."
5. In addition to the terms of reference made by the Additional CIT
on 26.11.2011, which was itself based on the terms of reference for
special audit as forwarded by the respondent no.2, which in turn was a
joint reference in the case of the petitioner as well as in the case of
AT& T Global Network Services Pvt. Ltd., the following terms of
reference regarding the special audit in the case of the petitioner were
sent by the respondent no.2 to the respondent no.1 through proper
channel. In this letter, the respondent no.2 stipulated the following terms
of reference in the petitioner's case as under:
" 1. The assessee has shown revenue/income of
Rs.16,39,22,134/-, Rs,1,02,31,081/- and Rs.25,91,859/- as
sale of services to group concerns namely, M/s AT&T
Communication Services International Inc., USA, M/s
AT&T Solutions Inc., USA and M/s AT&T Singapore Pte.
W.P. (C) No811/2012 Page 6 of 19
Ltd. respectively. The auditor may identify the
method/accounting standard applied for recognition of
income on this account and also report on the correctness
of the income recognised.
1. The assessee has claimed expenses of Rs.3,94,60,579/-
incurred in foreign currency on salary and other
perquisites. The auditor may report whether this
expenditure relates to assessee's business and whether this
expenses is paid to assessee's employees.
2. The assessee has shown purchase of equipment of
Rs.2,47,69,200/- in foreign currency. The auditor may
identify the income reported by the assessee in respect of
this equipment and identify the equipment. The auditor
may also report whether any foreign exchange fluctuation
has arisen on this transaction and whether it is on a
revenue or capital account.
Yours faithfully,
Sd/-
A.K.Dhir
Asst. Commissioner of Income Tax,
Circle 2(1), New Delhi."
6. On 23.12.2011, the Commissioner of Income Tax, Delhi-1, New
Delhi, who is the first respondent herein accorded his approval to the
special audit proposed in the case of the petitioner and appointed M/s.
T.R. Chaddha, Chartered Accountant, Kuthiala Building, Connaught
Place, New Delhi as the special auditors.
W.P. (C) No811/2012 Page 7 of 19
7. It is noteworthy that in the approval accorded by the respondent
no.1, by letter dated 23.12.2011, there is reference to the terms of
reference dated 16.12.2011, sent by the respondent no.2 herein.
8. The contention put forth on behalf of the petitioner against the
order for special audit in the petitioner's case is threefold; (i) the books
of account were not called for or examined by the Assessing Officer and
no special audit can be ordered without examining the books of account
of the assessee as without such an examination the Assessing Officer
would not be in position to assess the nature and complexity of the
accounts; (ii) no show cause notice was issued before ordering a special
audit and thus there was a breach of the rules of natural justice and ; (iii)
there was complete non-application of mind by the first respondent
while according approval to the proposal for special audit in the
petitioner's case. In support of this contention, our attention was drawn
to the decisions of the Supreme Court in Rajesh Kumar & Ors. Vs. Dy.
CIT (2006) 287 ITR 91 and Sahara India (Firm). Vs. Commissioner Of
Income-Tax And Another (2008) 300 ITR 403, as also the judgment of
this Court in DDA Vs. UOI (2013) 350 ITR 432.
9. One subsidiary contention raised on behalf of the petitioner was
that there was an interpolation in the order sheet relating to the
W.P. (C) No811/2012 Page 8 of 19
proceedings before the Assessing Officer on 14.10.2011 and 19.10.2011
so as to make it appear as if there was an examination of the books of
account by the Assessing Officer before proposing a special audit. The
submission is that there was in fact no examination of the books of
account of the petitioner.
10. The learned standing counsel appearing for the revenue submitted
that Section 142(2A) refers only to "...............nature and complexity of
the accounts of the assessee................." and it does not refer to "books of
account", and that the word "accounts" is broader than "books of
account" as held by the Supreme Court in Rajesh Kumar (supra). He
further submitted that the complexity of the accounts would be clear
from the information supplied by the petitioner in its letter dated
31.10.2011 (Annexure P-13) written in response to the various notices
issued by the Assessing Officer. He pointed out that the Assessing
Officer in the terms of reference made vide letter dated 16.11.2011 has
recognized the need to identify the method and the accounting standard
applied for recognition of income from sale of services to group
concerns. Reference is also made to paragraph 2 of the order passed by
the respondent no.2 under Section 142(2A), which is the impugned
order, in which there is a discussion of the complexities in the accounts
W.P. (C) No811/2012 Page 9 of 19
of the assessee including the complexity in the matter of attributing and
allocating the costs incurred by the petitioner against three type of
telecommunications services rendered by the petitioner which gave rise
to its revenues. The discussion also includes the method to be adopted in
apportioning the infrastructure costs, last mile charges and the inter
group charges against the revenues. According to the learned senior
standing counsel, these complexities are sufficient to justify the
reference to a special audit. In this behalf reliance was placed on a
judgement of this court in Central Warehousing Cooperation Vs.
Secretary, Department of Revenue & Ors. (2005) 277 ITR 452.
11. The learned standing counsel also pointed out that the special
audit is now completed and the audit report is ready with the special
auditor. He also pointed out that the other company of the same group,
namely, AT&T Global Network Services Ltd., in which case also a
special audit was approved, did not object to the same and that as a result
of the special audit in that case, substantial tax evasion was detected.
So far as the allegation of interpolation in the order sheet entries made
on 14.10.2011 and 19.10.2011 is concerned, the learned standing
counsel pointed out that by the notice dated 14.10.2011 issued under
Section 142(1) of the Act, the respondent no.2 had inter alia called for
W.P. (C) No811/2012 Page 10 of 19
the ledger accounts relating to the advances received from customers and
those relating to the debtors and related parties and it was these ledger
accounts, which were subjected to examination by the A.O. on
19.10.2011. He denied that there was any interpolation in the order
sheet entries.
12. We have carefully considered the material on record in the light of
the rival submissions, but find no merit in the writ petition.
13. So far as the contention that there was no valid show cause notice
issued by the A.O. under Section 142(2A) is concerned, we find no merit
in the same. As already pointed out, even in the petitioner's letter dated
31.10.2011, addressed to the respondent in response to various notices
issued by the latter and with reference to the subsequent discussions held
in the course of the hearing which took place on 19.10.2011, the
petitioner has submitted an elaborate reply in paragraph 9 of the letter
under the caption "show cause as to why special audit under Section
142(2A) of the Act should not be conducted in the instant case". This
paragraph clearly refers to the request made by the respondent on
19.10.2011 to the petitioner to show cause as to why special audit should
not be conducted because of the nature and complexity in the financial
statements. The letter then proceeds to elaborately raise objections to the
W.P. (C) No811/2012 Page 11 of 19
show cause notice, supported by case law. The objections run into more
than five pages. The petitioner in these objections has harped that there
was no complexity in its accounts and that the provisions of Section
142(2A) not only require complexity in the accounts, but also require
that there must be some prejudice to the interests of the revenue. The
petitioner also objected to the show cause notice on the ground that
application of mind is required by the tax officer in order to reach an
objective satisfaction and the requirement of Instruction No. 1076 dated
12.07.1997 issued by the CBDT was quoted in the letter. In the light of
these detailed objections it is ideal on the part of the petitioner to
contend that no show cause notice was issued by the A.O. Section
142(2A), before insertion of the first proviso by the Finance Act, 2007,
w.e.f. 1.6.2007, did not contemplate any show cause notice. Even so the
Supreme Court in the case of Rajesh Kumar (supra) held that since an
order directing special audit entails civil consequences, the principles of
natural justice in the form of hearing have to be complied with, though
the hearing need not be elaborate. It was also held that the notice to
show cause may contain the approval issues that the A.O. thinks to be
necessary and need not be elaborate or detailed ones. This view was
affirmed by the larger Bench of the Supreme Court in Sahara India
W.P. (C) No811/2012 Page 12 of 19
(Firm) Vs. CIT (supra). The requirement of the first proviso that there
should be adherence to the rules of natural justice and that the assessee
should be given an opportunity of being heard before issuing a direction
for special audit is satisfied in the present case. The respondent no.2 did
require the petitioner to show cause as to why a special audit should not
be directed in this case on 19.10.2011; the show cause notice was
replied to by the petitioner by a letter dated 31.10.2011. The contention
of the petitioner that no show cause notice was issued therefore fails.
14. The next contention to the effect that the books of account were
not called for and examined by the A.O. and therefore the direction for
special audit is bad in law is also without merit. As already pointed out
while referring to the contention of the learned standing counsel for the
Income Tax Department, sub-section (2A) of Section 142 does not
require the "books of account" to be examined by the A.O. It empowers
the A.O., with the previous approval of the Chief Commissioner or
Commissioner of Income Tax, to direct the assessee to get the accounts
audited if he is of the opinion that it is necessary to do so " having
regard to the nature and complexity of the accounts of the assessee and
the interests of the revenue.......". It has been held by a Division Bench
of this Court in Rajesh Kumar, Prop. Surya Trading Vs. Dy.CIT (2005)
W.P. (C) No811/2012 Page 13 of 19
275 ITR 641, that the expression "accounts" used in the section does not
refer merely to "books of account" of the assessee; it could include the
books of account, balance sheets and all other records which are
available to the A.O. during the assessment proceedings. It refers to the
other records available with the A.O. not only in the course of the
assessment proceedings but also at any stage subsequent thereto. It was
held that the expression "accounts" cannot be confined to books of
account as submitted by the assessee, as it would amount to giving an
interpretation which completely defeats the very object of the section. It
was further held that the fact that the accounts of the assessee are subject
to audit under some other statute is also no ground to hold that in such a
case the A.O. cannot direct a special audit. It was observed that in
addition to the books of account, the A.O. may also take into
consideration such other documents related thereto and which would be
part of the assessment proceedings. This judgment was followed by
another Division Bench of this court in Central Warehousing
Corporation (supra). In the light of these authorities, it is not possible to
accept the contention that the A.O. cannot direct a special audit unless
he examines the books of account.
W.P. (C) No811/2012 Page 14 of 19
15. In the case before us the A.O. has taken the view that there is
complexity in the accounts of the assessee. He has referred to the three
segments or sources of revenue of the petitioner and has held that it is
required to identify the method and the relevant accounting standard
applicable for recognition of income from these revenues and also to
ascertain the correctness of the income recognized. Paragraph 2 of the
order passed under Section 142(2A) on 26.12.2011 contains a detailed
discussion as to the complexity of the accounts. The profit and loss
account, balance sheet and the computation of the income were before
the A.O. It can hardly be disputed that the profit and loss account and
the balance sheet fit the description of " accounts". The complexity
arising out of such accounts is the difficulty in allocating the expenses
incurred by the petitioner against the three segments of revenues namely;
(i) market research, administrative support and liaison services; (ii)
network connectivity services and (iii) managed network services. The
A.O. further proceeds to state in the impugned order that the allocation
of costs/expenses impacts the profit and loss account (and the ultimate
profit figure) and the method and the basis for such allocation is
required to be verified and examined by the special auditor. The other
complexity adverted to by the respondent is the plea taken by the
W.P. (C) No811/2012 Page 15 of 19
petitioner that the overseas payments cannot be characterized as fees for
technical services but represented purchase price of goods and services
and therefore there was no obligation on its part to deduct tax under
Section 195. Yet one more complexity is the nature of the other costs
debited in the profit and loss account which include infrastructure costs,
last mile charges and inter group charges. The precise nature of these
costs is required to be ascertained not only from the legal aspect but also
from the accounting aspect, to determine the applicability of Section
40(a)(ia). One more important issue which according the A.O. is quite
complex is the "last mile charges". Noting that this is a heavily capital
intensive project and the capitalised infrastructure is eligible for
depreciation, the respondent has observed that the assessee has deducted
the entire last mile charges from the services revenue thereby nullifying
any income on this score. According to him the inclusion of the last mile
charges in the profit and loss account as a debit, when the capitalised
infrastructure cost is eligible also to depreciation, may amount to double
deduction. Whether this would amount to double deduction is an aspect
which the special audit was required to examined.
16. The question whether the accounts and the related documents and
records available with the A.O. present complexity is essentially to be
W.P. (C) No811/2012 Page 16 of 19
decided by the A.O. and in this area the power of the court to intrude
should necessarily be used sparingly. It is the A.O. who has to complete
the assessment. It is he who has to understand and appreciate the
accounts. If he finds that the accounts are complex, the court normally
will not interfere under Article 226. The power of the court to control
the discretion of the A.O. in this field is limited only to examine
whether his discretion to refer the accounts for special audit was
exercised objectively, as far as the accounts, records, documents and
other material present before the A.O. would permit. There must be
valid material before the A.O. from which he apprehends that there is
complexity. As to what material would make the accounts complex is
essentially for the A.O. to determine and unless his decision can be
attacked on the ground of perversity or absolute arbitrariness or mala
fide, it should not be interfered with. In the present case we are satisfied
that the accounts including the documents, records and other material
before the A.O. did make the issues for his decision complex requiring a
special audit. We are accordingly not inclined to accept the contention of
the assessee to the contrary.
17. The other contention is that there was non-application of mind by
the respondent no.1 while according his approval to the proposal for
W.P. (C) No811/2012 Page 17 of 19
special audit. We do not think that this contention is justified at all. The
terms of reference sent by the respondent no.2 were before him. There is
no requirement that the approving authority has to record elaborate
reasons for approval. Of course, approval cannot be mechanical. We
find that the approval was forwarded through the Additional CIT,
Range-2, New Delhi, under cover of letter dated 28.11.2011. In this
letter there is also a reference to the related parties' transaction and to the
assessee's detailed reply dated 31.10.2011. The CIT had before him the
views of the respondent no.2 as also those of the petitioner as to what it
had to say in reply. The approval was accorded by the CIT on
23.12.2011. It cannot, therefore, be said that the CIT did not apply his
mind to the proposal for special audit. The contention of the petitioner
to the contrary is not accepted.
18. In the course of the arguments it was submitted on behalf of the
petitioner that the assessing officer referred the matter to the Transfer
Pricing Officer under Section 92 CA of the Act on which the latter did
make an addition of Rs.1.53 crores on account of transactions with the
petitioner's associated enterprises and it was at that stage the assessing
officer made a reference to special audit; the suggestion was that the
exercise was uncalled for since the direction of the TPO was binding on
W.P. (C) No811/2012 Page 18 of 19
the AO in any case. Statutorily, the AO is empowered to refer the
accounts to the special auditor "at any stage of the proceedings"
S.142(2A); there is no bar, and there is nothing in the sub-section which
makes its provisions subject to the powers of the TPO. The reference to
special audit cannot be held to be contrary to law on that score.
19. In the view we have taken, we do not consider it necessary to
examine the contention of the petitioner based on alleged interpolation
of entries in the order sheet on 14.10.2011 and 19.10.2011.
20. In the result the writ petition and all connected applications are
dismissed with no order as to costs.
(R.V. EASWAR)
JUDGE
(S. RAVINDRA BHAT)
JUDGE
FEBRUARY 21, 2014
mg
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