TMI Blog2011 (10) TMI 262X X X X Extracts X X X X X X X X Extracts X X X X ..... on (3) of Section 92CA of the At, such issue would be closed. - no need to give persoanl hearing to the assessee before referring case to TPO. Determination of transaction - statutory change to section 92CA - binding nature of opinion of TPO - held that:- By virtue of newly substituted sub-section (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. Powers of DRP - The issue whether there was an international transaction or not can also be examined by the Dispute Resolution Panel at the instance of the assessee. There is nothing to limit the powers of Dispute Resolution Panel to completely nullify the variations arising out of the order of the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me. During the assessment proceedings, the petitioner received a notice dated 20th December 2010 under Section 142 of the Act issued by the respondent No.1, the Assessing Officer. In the said notice, the Assessing Officer stated that on perusal of the assessment records for the assessment year 2007-08, it was observed that the petitioner had filed an audit report in the prescribed form as required under Section 92E of the Act as there were international transactions with associated concern viz. M/s.Blue Gems BVBA. The assessment proceedings for the assessment year 2007-08 are in progress. The audit report showed that during the previous year relevant to the assessment year 2008-09, the petitioner had international transactions with the said associated concern viz. M/s.Blue Gems BVBA, amounting to Rs.78.63 crores. However, the record does not show that the assessee had filed the audit report under Section 92E of the Act in the prescribed form. The petitioner was, therefore, required to explain why penalty proceedings under Section 271BA of the Act should not be initiated. 2.2 In response to such communication, the petitioner replied under letter dated 21st December 2010 to the res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue Gems BVBA and Veer Gems, it is clear that the provisions of section 92A(2)(i), (j), (k), (l) and (m) are attracted and hence the party is liable to be treated as an associate enterprise under the provisions of the section 92A(1). 6. You are, therefore, directed to show cause as to the transactions with Blue Gems BVBA should not be subject to transfer pricing proceedings and the profits of Veer Gems not appropriately modified. Your reply should reach this office on or before 19/8/2011 positively. Please note that sufficient opportunity has already been granted to you and no further opportunity will be granted to you for representing your case before this office. The matter will be decided based on the accounts of your company and the financial statements of Blue Gems BVBA available with international database firms. Hearing in your case is fixed from 19/8/2011 at 4 pm. At this stage the petitioner has approached this Court by filing present petition and challenged the reference made by the respondent No.1- Assessing Officer to the respondent No.2-TPO and also the communication dated 16th August 2010 addressed by the respondent No.2-TPO, by which the petitioner is required to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld have been made by the Assessing Officer. The objections raised by the petitioner have not been dealt with. Unilaterally, the reference has been made which is wholly impermissible. Counsel contended that without first deciding the issue whether the petitioner had entered into any international transaction, the reference to the TPO could not have been made. He submitted that upon reference to the TPO, the assessee is exposed to entirely different assessment mechanism and assessee cannot be put to such inconvenience without ascertaining the very foundational fact whether reference to the TPO was necessary or not. Our attention was drawn to various statutory provisions contained in the Act with respect to international transactions. On the other hand, learned Senior Counsel Shri Manish Bhatt appearing for the respondents opposed the petition contending that at this stage when the Assessing Officer was making a reference to the TPO, the Assessing Officer only had to be of the opinion that in an international transaction such reference was necessary. At that stage, participation of the assessee and final conclusion of existence or otherwise of international transaction, was not nece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer that it is necessary or expedient so to do. In this respect, it was observed as under : 20. There is nothing in section 92CA itself that requires the Assessing Officer to first form a considered opinion in the manner indicated in section 92C(3) before he can made a reference to the Transfer Pricing Officer. In our view, it is not possible to read such a requirement into section 92CA(1). However, it will suffice if the Assessing Officer forms a prima facie opinion that it is necessary and expedient to make such a reference. One possible reason for the absence of such a requirement of formation of a prior considered opinion by the Assessing Officer is that the Transfer Pricing Officer is expected to perform the same exercise as envisaged under section 92C(1) to (3) while determining the ALP under section 92CA(3). The latter part of section 92CA(3) unambiguously states that the Assessing Officer shall by order in writing, determine the arm's length price in relation to the international transaction in accordance with sub-section (3) of the section 92C. It will be pointless to have a duplication of this exercise at two stages one after the other. On the other hand, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2) Where in an international transaction, two or more associated enterprises enter into a mutual agreement or arrangement for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises, the cost or expense allocated or apportioned to, or, as the case may be, contributed by, any such enterprise shall be determined having regard to the arm's length price of such benefit, service or facility, as the case may be. 7.2 The term associated enterprise is defined in Section 92A of the Act. The relevant portion of Section 92A of the Act reads as under : 92A.(1) For the purpose of this section and sections 92, 92B, 92C, 92D, 92E and 92F, associated enterprise , in relation to another enterprise, means an enterprise- (a) which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; or (b) in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollowing methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :- (a) comparable uncontrolled price method; (b) resale price method (c) cost plus method (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board. (2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed : Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be arithmetical mean of such prices, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean. 7.5 Section 92CA of the Act pertains to reference to Transfer Pricing Officer and it reads as under : 92CA. (1) Where any person, being the assessee, has entered into an international transaction in any previous year, and the Assessing O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apply accordingly. (6) Where any amendment is made by the Transfer Pricing Officer under sub-section (5), he shall send a copy of his order to the Assessing Officer who shall thereafter proceed to amend the order of assessment in conformity with such order of the Transfer Pricing Officer. (7) The Transfer Pricing Officer may, for the purposes of determining the arm's length price under this section, exercise all or any of the specified in clauses (a) to (d) of sub-section (1) of section 131 or sub-section (6) of section 133. 7.6 Section 92F of the Act contains definition of certain terms relevant to computation of arm's length price. In particular Clause 2 of Section 92F of the Act defines the term arm's length price as under : 92F. In sections 92, 92A, 92B, 92C, 92D and 92E, unless the context otherwise requires; - (i) xxx xxx (ii) arm's length price means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions; 7.7 Section 144C of the Act provides for reference to Dispute Resolution Panel. Relevant portion of Section 144C reads as under : 144C. (1) The Assessing Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions proposed in the draft order so, however, that it shall not set aside any proposed variation or issue any direction under sub-section (5) for further enquiry and passing of the assessment order. (9) xxx xxx (10) Every direction issued by the Dispute Resolution Panel shall be binding on the Assessing Officer. (11) No direction under sub-section (5) shall be issued unless an opportunity of being heard is given to the assessee and the Assessing Officer on such directions which are prejudicial to the interest of the assessee or the interest of the revenue, respectively. (12) xxx xxx (13) Upon receipt of the directions issued under sub-section (5), the Assessing Officer shall, in conformity with the directions, complete, notwithstanding anything to the contrary contained in section 153, the assessment without providing any further opportunity of being heard to the assessee, within one month from the end of the month in which such direction is received. (14) xxx xxx (15) For the purposes of this section, - (a) xxx xxx (b) eligible assessee means, - (i) any person in whose case the variation referred to in sub-section (1) arises as a consequence of the order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt under sub-section (1) of Section 92B of the Act, it is necessary that there has been a transaction between two associated enterprises before a reference under Section 92C can be made by the Assessing Officer. So much is plain and clear from the statutory provisions contained in the Act. The question is at what stage it must be finally and conclusively held by the Assessing Officer that in the previous year relevant to the assessment year under consideration there had been an international transaction between the petitioner and the associated enterprise. Surely the TPO would not be a competent authority to decide this issue. From the statutory provisions we have noticed, it clear emerges that upon a reference the TPO has to serve a notice on the assessee requiring him to produce or cause to be produced evidence on which the assessee may rely in support to the computation of the arm s length price in relation to an international transaction. Thereupon, the TPO after considering such evidence, as the assessee may produce, including the documents referred to in Section 92D of the Act, has to pass an order in writing determining the arm s length price in relation to the international ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viz. M/s.Blue Gems BVBA. In the present year i.e. previous year relevant to the assessment year 2008-09 also, the assessee had entered into transactions with the same concern, but had not filed prescribed reports. It was on this basis that the Assessing Officer was of the opinion that the petitioner had entered into international transaction during the previous year relevant to the assessment year 2008-09 also and that it was necessary to refer the computation of arm s length price to the TPO. 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 respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the total income of the assessee having regard to the arm s length price determined under sub-section (3) of Section 92CA of the Act by the TPO. To our mind, this statutory change has no significant effect on our interpretation recorded hereinabove. By virtue of newly substituted sub-section (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. 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 cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompletely nullify the variations arising out of the order of the TPO if it is found that there had, in fact, been no international transaction and that, therefore, the reference itself was invalid. Sub-section (5) of Section 144C of the Act empowers the Dispute Resolution Panel to issue such directions as it thinks fit for the guidance of the Assessing Officer. When sub-section (8) of Section 144C of the Act authorizes the Dispute Resolution Panel to confirm, reduce or enhances the variations proposed by the TPO, it can also annul any computations proposed on the basis of the order of the TPO. Counsel for the petitioner, however, submitted that if the Assessing Officer submits to the jurisdiction of the Dispute Resolution Panel, the assessee would lose one stage of appeal. Under ordinary circumstances, against the order of the Assessing Officer, the assessee would be entitled to appeal to the CIT (Appeals) and thereafter to the Tribunal. If an assessee raises objections before the Dispute Resolution Panel under Section 144C of the Act, the order of the Assessing Officer, which may be passed thereafter would be appeallable directly to the Tribunal. To our mind, this would not, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f. Such issue has to be decided by the Assessing Officer alone. Counsel for the petitioner submitted alternatively that this is a case where ex-facie it can be established that there had been no international transaction between the petitioner and the associated enterprise. However, we notice that admittedly between the petitioner and M/s.Blue Gems BVBA there was an international transaction in the preceding year and the assessee had admittedly filed a report under Section 92E of the Act. It further emerges that in the current year also the assessee had entered into transaction worth Rs.78.63 crores. In the affidavit-in-reply it is further stated that Veer Gems has made substantial purchases from M/s.Blue Gems BVBA. The Partners of Veer Gems are three brothers Shri Piyush M Shah, Mukesh M Shah and their wives/son, together holding the entire partnership stake. The fourth brother Nareshkumar Shah, along with his wife Surekhaben Shah and his son Mitesh Shah control the entire share holding of M/s.Blue Gems BVBA, the fourth brother and his son being directors of the company. It is clear that both the entities are being controlled by the same family of four brothers and their close r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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