TMI Blog2021 (8) TMI 930X X X X Extracts X X X X X X X X Extracts X X X X ..... ce to the T.P.O. We are of the view that an opportunity of hearing should have been given by the A.O. before he proceeded to overrule all the objections and refer the matter to the T.P.O. No satisfaction being recorded in the order disposing of the objections - We find substance in the contention raised as A.O. could be said to have overlooked or rather ignored the jurisdictional requirement of a satisfaction in accordance with para 3.4 of the instruction No.3 of 2016 referred to above that there ought to be an income or potential of an income arising and/or being affected on determination of the A.L.P. of an international transaction or specified domestic transaction. In the absence of such satisfaction being recorded in the order disposing of the objections, the reference to the T.P.O. would also be without jurisdiction. We take notice of the fact that in the objections, a specific plea in this regard was taken, however, we do not find a word in this regard in the order disposing of the objections. On this issue, the only reply of the learned Senior Counsel appearing for the Revenue is that the same is self-serving and adherence the record. In other words, the only argument ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness of manufacturing Industrial Automation Solution, Rotating Machine Control, Power Controller, Uninterrupted Power Supply and Power Conditioning products. In relation to A.Y. 2017-18, the writ applicant had availed an unsecured External Commercial Borrowing (ECB) rupee loan from the Hitachi International Treasury Limited, Singapore, for the purpose of working capital. This loan carries an interest at the rate of 7.19% per annum. The writ applicant filed Form 3CEB, wherein there is a requirement in clause 14 to make a disclosure about the loan or borrowing of money and the amount paid / received in the transaction. 5 In the aforesaid context, it is the case of the writ applicant that it had appropriately disclosed the transaction in the Form 3CEB. 6 The respondent No.1 issued a show cause notice dated 18th November 2019 under Section 142(1), which reads thus: 1. During the previous year, assessee company has taken loan from Hitachi International Treasury limited to the tune of ₹ 20 Crores @ 7.19% interest. Further same was required to be reported in 3CEB but assessee has failed to do so. Therefore you are requested to show cause as to why penalty u/s 271AA of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 11. On perusal of clause 18 of the tax audit report, it is noticed that block of asset has been increased due to change in rate of exchange. Details of same area as under: a) Building:1,13,32,654/- b) F F :-3,22,750/- c) Plant Machinery (15%): 90,74,176/- d) Plant Machinery (60%): 5,11,555 In this regard, you are requested to provide following: 1. Explain such large amount of details addition due to change in foreign exchange rate difference. b) In audited financial statement value of fixed asset has decreased by ₹ 8,10,920/- due to exchange rate difference c) Whether foreign exchange rate difference Loss of ₹ 2,12,41,135/- debited to P L account have disallowed or not in computation of total income, if such loss Is capital in nature. d) Reason for huge foreign exchange loss in respect of block of building. 12. On verification of submission so made by assessee company and on verification of earlier years records, it is noticed that certain additions were made on recurring issues. Therefore, you are requested to show cause as to why similar additions/disallowances should not be made during the ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tial of an income arising and/or being affected on determination of the A.L.P. of an international transaction or specified domestic transaction. Mr. Soparkar would submit that in the absence of such satisfaction being recorded as to the income or a potential of an income, the entire exercise undertaken by the A.O. could be termed as illegal and without jurisdiction. Mr. Soparkar would submit that in the case on hand, neither at the time of issue of show cause notice nor in the order disposing of the objections, there is any whisper of income or a potential income arising and/or being affected on the determination of the A.L.P. of an international transaction of the loan of ₹ 20 Crore. Mr. Soparkar would submit that there is no satisfaction on the part of the A.O. that there is any income arising on the determination of the A.L.P. of loan transaction and in such circumstances, it could be said that the A.O. had no jurisdiction to refer the matter to the T.P.O. 12 Mr. Soparkar further submitted that the transaction of loan being on the capital account, there cannot be any impact on income. He would argue that the writ applicant has disclosed the transaction of payment inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce dated 20th December 2019. 16 Mr. Soparkar, in support of his aforesaid submissions, has placed reliance on the following decisions: [1] Indorama Synthetics (India) Ltd vs. Additional Commissioner of Income-tax reported in [2016] 71 taxmann.com 349 (Delhi) [2] Alpha Nipon Innovatives Ltd. vs. Deputy Commissioner of Income-tax, Circle 1(1)(1)(1) 1 reported in [2016] 76 taxmann.com 166 (Gujarat) [3] Mehsana District Co-operative vs. Deputy Commissioner of Income Tax [Special Civil Application No.19073 of 2017 decided on 6th March 2018] SUBMISSIONS ON BEHALF OF THE REVENUE: 17 Mr. M. R. Bhatt, the learned Senior Counsel assisted by Ms. Mauna Bhatt, the learned Senior Standing Counsel appearing for the Revenue has vehemently opposed the present writ application submitting that during the year under consideration, the writ applicant had obtained loan from the Hitachi International Treasury Limited to the tune of ₹ 20 Crore at the rate of 7.19% and such transaction was required to be reported in the Form 3CEB. However, Mr. Bhatt would submit that the writ applicant failed in reporting the transaction of loan in the column No.8 of the Form 3CEB. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , loan is the transaction which was required to be reported in the Form 3CEB. The writ applicant had availed loan from the associated enterprise. However, the writ applicant failed to report the said transaction i.e. the loan amount in the Form 3CEB. Mr. Bhatt pointed out that Section 92E of the Act read with Rule 10E of the Income Tax Rules mandates the person who has entered into an international transaction to furnish report from an Accountant in the Form 3CEB. 21 Mr. Bhatt pointed out that the Form 3CEB has been produced by the writ applicant from page 13 onwards of the memorandum of the writ application. The part A of Annexure to Form 3CEB, more particularly, item No.8 requires the assessee the writ applicant to provide the Aggregate value of international transactions as per books of accounts . The writ applicant had reported an amount of ₹ 50,14,114/-. However, the said figure does not include the loan amount of ₹ 20 Crore taken from the Hitachi International Treasury Limited. Therefore, there is an admitted failure on the part of the writ applicant to disclose such amount of international transaction in the column No.8. 22 Mr. Bhatt next submitted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y further 12 months as reference under Section 92CA(1) of the Act was made which expired on 31st December 2020. In view of the Covid-19 pandemic, the time limit to frame the assessment came to be extended till 31st March 2021 in light of the Taxation and Other Laws (Relaxation of Certain Provisions), Ordinance, 2020. Explanation 1(ii) to Section 153 provides for exclusion of the period during which the assessment proceeding is stayed by an order or injunction of any Court. The Act does not provide for any exclusion of period during which the Transfer Pricing proceedings are stayed. In the event, this Court quashes the reference made to the T.P.O., the assessment proceedings would get time barred. 25 Mr. Bhatt invited the attention of this Court to the decision of the Supreme Court in the case of VLS Finance Limited vs. CIT reported in 384 ITR 1. In the said case, the assessee had challenged the direction for Special Audit under Section 142(2A) of the Act and the High Court had granted stay against such direction for special audit without any stay on the assessment proceedings. The Supreme Court held that the special audit is an integral part of the assessment proceedings i.e. wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcle 7 and others [Special Civil Application No.12648 of 2011 decided on 19th October 2011] ANALYSIS: 29 Having heard the learned counsel appearing for the parties and having gone through the materials on record, the following two questions fall for our consideration: [1] Whether it was incumbent on the A.O. to have given the writ applicant an opportunity of being heard before making a reference to the T.P.O. under Section 92CA(1) of the Act? [2] Whether the Assessing Officer could be said to have overlooked the jurisdictional requirement of a satisfaction in accordance with para 3.4 of the instruction No.3 of 2016 that there ought to be an income or a potential of an income arising and/or being affected on determination of the A.L.P. of an international transaction or specified transaction? In the absence of recording of such satisfaction, as to the income or potential of an income, could it be said that the entire exercise undertaken by the A.O. is illegal? 30 On the first question i.e. as regards giving an opportunity of hearing, Mr. Soparkar has placed strong reliance on the decision of the Delhi High Court in the case of Indorama Synthetics (India) Ltd (sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1), comes to the notice of the Transfer Pricing Officer during the course of the proceedings before him, the provisions of this Chapter shall apply as if such other international transaction is an international transaction referred to him under sub-section (1) (2B) Where in respect of an international transaction, the Assessee has not furnished the report under Section 92 E and such transaction comes to the notice of the Transfer Pricing Officer during the course of the proceeding before him, the provisions of this Chapter shall apply as if such transaction is an international transaction referred to him under sub-Section (1). (2C) Nothing contained in sub-Section (2B), shall empower the Assessing Officer either to assess or reassess under Section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the Assessee under Section 154, for any assessment year, proceedings for which have been completed before the 1st day of July 2012. (3) On the date specified in the notice under sub-Section (2), or as soon thereafter as may be, after hearing evidence as the Assessee may produce, including any information or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt s report containing the details of the international transaction entered into by the taxpayer during the AY in question. Where no such report in Form 3 CEB is filed by the Assessee, what will be the basis for the AO to record that it is necessary and expedient to refer the question of determination of the ALP of such transaction to the TPO? Where the AO is of the view that a transaction reflected in the filed return partakes of the character of an international transaction, he will put the Assessee on notice of his proposal to make a reference to the TPO under Section 92CA (1) of the Act. Before making a reference to the TPO, the AO has to seek approval of the Commissioner/Director as contemplated under the Act. Therefore, all transactions have to be explicitly mentioned in the letter of reference. The very nature of this exercise is such that the AO will first put the Assessee on notice of his proposing to make a reference to the TPO and seek information and clarification from the Assessee. If at this stage, the Assessee raises an objection as to the very jurisdiction of the AO to make the reference, then it will be incumbent on the AO to deal with such objection on merits. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at provisions of Chapter X did not apply to issue of equity shares. Without prejudice, VISPL contested the SCN on merits. The TPO passed an order on 28th January 2013 negativing the above contentions of the Petitioner and proceeded to determine the ALP of the transaction in question. The AO then issued a draft assessment order under Section 143 read with Section 144-C(1) of the Act adding the entire income determined by the TPO to VISPL's income. VISPL then filed objections to the draft assessment order before the Dispute Resolution Panel ( DRP‟s length price in relation to the said international). Objections were raised only with regard to the issues of valuation and quantification and not with regard to the issue of jurisdiction. A writ petition was later filed in the Bombay High Court challenging the jurisdiction of the AO to make a reference of the above transaction to the TPO. 19.4 While discussing the provisions of Chapter X of the Act and in particular Section 92CA thereof, the Bombay High Court observed as under: 32. It is clear that in view of Section 92 (1), there must be income arising and/or affected or potentially arising and/or affected by an In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 92CA (4), the Assessing Officer is bound to pass an order in conformity with the ALP determined by the TPO as held by another Division Bench of this Court in the judgment dated 6th September 2013 in Vodafone II case. However, where the Assessing Officer is himself determining the ALP in terms of Section 94C (3) then in accordance with Section 94C (4) he would compute the income, having regard to the ALP. In such cases, where the Assessing Officer decides the ALP himself, it is open to him to consider the issue of income arising and/or being affected or not before commencing the proceedings under Chapter X or at the stage of passing an assessment order. 19.5 The Bombay High Court further observed that where the objection is raised about the applicability of Chapter X of the Act, then the requirement for taking a decision after taking on board the objection becomes necessary. In the absence of it being considered at this stage, the same could only be considered by the DRP and as pointed out above, if considered at the very threshold by the Assessing Officer, it could save an elaborate exercise of determining the ALP which may turn out to be entirely academic. It is in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the Bombay High Court in Vodafone India Services (P) Limited v. Union of India (supra). It appears that the CBDT has specifically accepted the legal position as explained by the Bombay High Court in the aforementioned decision and has not gone by the decision by the Gujarat High Court in Veer Gems (supra). Instruction No. 15 of 2015 dated 16th October 2015 issued by the CBDT which sets out, inter alia, the procedure to be followed by the AO has since been replaced by Instruction No.3 of 2016 dated 10 th March 2016. Para 3.4 thereof reads as under: 3.4 For cases to be referred by the AO to the TPO in accordance with paras 3.2 and 3.3 above, in respect of transactions having the following situations, the AO must, as a jurisdictional requirement, record his satisfaction that there is an income or a potential of an income arising and/or being affected on determination of the ALP of an international transaction or specified domestic transaction before seeking approval of the PCIT or CIT to refer the matter o the TPO for determination of the ALP: (a) where the taxpayer has not filed the Accountant‟s length price in relation to the said internationals report under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to hear the assessee. The only obligation on the part of the A.O. is to consider the objections of the assessee and only thereafter make a reference to the T.P.O. to compute the Arm s Length Price. 32 We may now look into the decision of this High Court rendered in the case of M/s. Veer Gems (supra). We quote the relevant observations: 13. We do not find any provision under Chapter-X, which would require the Assessing Officer to hear the assessee, consider his objections and only thereafter make a reference to the TPO to compute the arm s length price. As already observed, it is true that the question of reference to the TPO would arise only in the case where there has been an international transaction between the assessee and the associated person. Such a question in a given case may also be highly disputed question. However, we do not find that under the scheme of the provision contained in Section-X of the Act, the Assessing Officer is obliged to grant hearing to the assessee, invite and consider the objections with respect to the question whether during the previous year relevant to the assessment year under consideration, there had been any international transaction be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act by the TPO. 17. To our mind, this statutory change has no significant effect on our interpretation recorded hereinabove. By virtue of newly substituted subsection (4) of Section 92CA of the Act, the Assessing Officer is now bound by the order of the TPO on the computation of the arm s length price of an international transaction, the Assessing Officer is not and cannot be stated to be bound by the opinion of the TPO with respect to the question whether there had, in fact, been an international transaction between the assessee and the associated person during the period under consideration. The TPO is not called upon to and, as held by us, is not competent to decide this issue. This issue is within the sole jurisdiction of the Assessing Officer. 18. The assessee has one more opportunity to contest the question of presence or absence of an international transaction. Under Section 144C of the Act, the Assessing Officer has to forward a draft of the proposed order of assessment to the eligible assessee. The eligible assessee, includes any person in whose case, variation arises as a consequence of the order of the TPO passed under sub-section (3) of Section 92CA of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laid by this High Court in M/s. Veer Gems (supra). However, we take notice of something in the judgement rendered by the Delhi High Court in the case of Indorama Synthetics (supra) and should not ignore the same. The Delhi High Court has noted in para 20 of its judgement that the C.B.D.T. has accepted the legal proposition as explained by the Bombay High Court in Vodafone India Services (P) Ltd's case (supra) and has not given by the decision of the Gujarat High Court in M/s. Veer Gems's case (supra). The Delhi High Court proceeded to note in para 20 that the instruction No.15 of 2015 dated 16th October 2015 issued by the C.B.D.T., which sets out, inter alia, the procedure to be followed by the A.O. has since been replaced by the instruction No.3 of 2016 dated 10th March 2016. The Delhi High Court, thereafter, proceeded to quote para 3.4 of the instruction No.3 of 2016, after referring to para 3.4 of the instruction, the Delhi High Court concluded that the A.O. must provide an opportunity of being heard to the taxpayer before recording his satisfaction or otherwise. 34 If the C.B.D.T. itself has accepted the dictum as laid by the Bombay High Court in Vodafone India Serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .O. to consider all the questions a fresh after giving an opportunity of hearing to the assessee. However, we would like to say something as regards the second question also posed by us. We first look into some relevant part of the instruction No.3 of 2016 dated 10th March 2016. We quote the same as under: SECTION 92C OF THE INCOME-TAX ACT, 1961 - TRANSFER PRICING - COMPUTATION OF ARM'S LENGTH PRICE - GUIDELINES FOR IMPLEMENTATION OF TRANSFER PRICING PROVISIONS - REPLACEMENT OF INSTRUCTION NO.15/2015 INSTRUCTION NO.3/2016 [F.NO.500/9/2015-APA-II], DATED 10-3- 2016 The provisions relating to transfer pricing are contained in sections 92 to 92F in Chapter X of the Income-tax Act, 1961. These provisions came into force w.e.f. Assessment Year 2002-2003 and have seen a number of amendments over the years, including the insertion of Safe Harbour and Advance Pricing Agreement provisions and the extension of the applicability of transfer pricing provisions to Specified Domestic Transactions. 2. In terms of the provisions, any income arising from an international transaction or specified domestic transaction between two or more associated enterprises shall be computed h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isdictional AO. Thus, if the reason or one of the reasons for selection of a case for scrutiny is a TP risk parameter, then the case has to be mandatorily referred to the TPQ by the AO, after obtaining the approval of the jurisdictional PCIT or CIT. 3.3 Cases selected for scrutiny on non-transfer pricing risk parameters but also having international transactions or specified domestic transactions, shall be referred to TPOs only in the following circumstances: (a) here the AO comes to know that the taxpayer has entered into international transactions or specified domestic transactions or both but the taxpayer has either not filed the Accountant's report under section 228 at all or has not disclosed the said transactions in the Accountant's report filed; (b) where there has been a transfer pricing adjustment of ₹ 10 Crore or more in an earlier assessment year and such adjustment has been upheld by the judicial authorities or is pending in appeal; and (c) where search and seizure or survey operations have been carried out under the provisions of the Income-tax Act and findings regarding transfer pricing issues in respect of international transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Press Information Bureau Government of India Cabinet 28 January 2015 Acceptance of the order of the High Court of Bombay in the case of Vodafone India Services Private Limited The Union Cabinet, chaired by the Prime Minister Shri Narendra Modi, in a major decision, has decided to accept the order of the High Court of Bombay in the case of Vodafone India Services Private Limited (VISPL) dated 10.10.2014. This is a major correction of a tax mater which has adversely affected investor sentiment. Based on the opinion of Chief Commissioner of Income-tax (International Taxation), Chairperson (CBDT) and the Attorney General of India, the Cabinet decided to: i. accept the order of the High Court of Bombay in WP No.871 of 2014 dated 10.10.2014 and not to file SLP against it before the Supreme Court of India. ii. accept of orders of Courts / IT AT / DRP in cases of other taxpayers where similar transfer pricing adjustments have been made and the Courts / ITAT / DRP have decided in favour of the taxpayer. The Cabinet decision will bring grater clarity and predictability for taxpayers as well as tax authorities, thereby facilitating tax compli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contribution towards the cost or expenditure is to be determined in respect of each AE having regard to ALP. It would have no application in the cases like the present one, where there is no occasion to, allocate, apportion or contribute any cost and/or expenses between the petitioner and the holding company. b) The crucial words shall be chargeable to income tax which are found in Section 42(2) of the 1922 Act are absent in Chapter X of the Act . Therefore it is clear that the deemed income which was charged to tax under Section 42(2) of 1922 Act was done away with under this Act. c) The tax can be charged only on income and in the absence of any income arising, the issue of applying the measure of Arm s Length Pricing to transactional value / consideration itself does not arise. d) If its income which chargeable to tax, under the normal provisions of the Act, then alone Chapter X of the Act could be invoked. Sections 4 and 5 of the Act brings / charges to tax total income of the previous year. This would take us to the meaning of the word income under the Act as defined in Section 2(24) of the Act. The amount received on issue of shares is admittedly a cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounsel appearing for the Revenue is that the same is self-serving and adherence the record. In other words, the only argument is that the Arm s Length Price on the interest paid would have bearing on the income. We are not convinced with such stance of the Revenue. 40 For all the foregoing reasons, we allow the present writ application. The impugned reference by the respondent No.1 to the respondent No.2 is hereby quashed and set aside and the notice dated 20th December 2019 (Annexure : 'A' to this writ application) is also quashed and set aside. The proceedings are remitted to the A.O. for fresh consideration of the matter and the issues as discussed in the present order. The A.O. shall give an opportunity of hearing to the assessee and thereafter, proceed to pass a reasoned order or a speaking order dealing with the objections in accordance with law. 41 Let the aforesaid exercise be undertaken within a period of four weeks from the date of receipt of the writ of this order. We clarify that on the point of limitation, we agree with the Revenue as discussed above. 42 In view of the final disposal of the writ application, the connected Civil Application would not su ..... X X X X Extracts X X X X X X X X Extracts X X X X
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