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AT & T COMMUNICATION SERVICES INDIA (P) LTD. Vs. COMMISSIONER OF INCOME TAX-I &ANR
March, 06th 2014
*            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




W.P. (C) No811/2012                                       Page 19 of 19

 
 
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