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TMI Blog2015 (9) TMI 960X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and in circumstances of the case in re-opening the assessment under section 148 of the Act. 2. The learned ACIT pursuant to the directions of the learned DRP erred in law and on the facts and in circumstances of the case in making an adjustment amounting to Rs. 13,993,968 to the value of international transactions entered into by the Appellant with its Associated Enterprise in respect of import of Compressors, Motors Oil, Spares etc. for trading activity. 3. The learned ACIT pursuant to the directions of the learned DRP erred in rejecting Transactional Net Margin Method ("TNMM") as the most appropriate method as selected by the Appellant and adopting the Resale Price Method ("RPM") as the most appropriate method for benchmarking the international transaction pertaining to trading activity. 4. The learned ACIT pursuant to the directions of the learned DRP erred in law and on the facts and in applying turnover filter of Rs. 1 crore to Rs. 50 crore for selection of comparable companies. 5. The learned ACIT pursuant to the directions of learned DRP has erred in law and on the facts and in circumstances of the case in selecting only 3 comparable companies and rejecting other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the Revenue, on the other hand, placed reliance on the order of the DRP, especially reference to pages 7 - 8 of the said order. 6. Briefly, the facts of the case are that assessee had furnished return of income on 18.10.2007 pursuant to which the return was processed under section 143(1) of the Act. However, the assessee had not received any intimation under section 143(1) of the Act. The said fact of the processing of the return is mentioned in the assessment order passed under section 143(3) r.w.s. 147 and 144C of the Act. The last date for issue of notice under section 143(2) was 30.09.2008, however, no notice under section 143(2) of the Act was issued by the Assessing Officer and the return of income was not picked up for scrutiny assessment. Thereafter, on 26.10.2009 reference was made by the Assessing Officer to the TPO for determining the arm's length price of the international transaction entered into by the assessee. On 22.10.2010, order was passed by the TPO under section 92CA(3) of the Act proposing an adjustment of Rs. 1,25,17,115/-. Thereafter, notice under section 148 of the Act was issued to the assessee on 14.01.2011. The last date for completing the assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... geable to tax had escaped assessment within the meaning of section 147(C)(i) of the Act. Accordingly, the Assessing Officer had reason to believe that income to that extent had escaped assessment for the impugned assessment order on account of adjustment to the international transaction carried out by the assessee. Pursuance to which notice under section 148 of the Act was issued to the assessee. The assessee has challenged the validity of the proceedings initiated under section 148 of the Act by way of ground of appeal No.1. 10. The plea of the assessee before us was that the said notice issued under section 148 of the Act to reopen the assessment was to circumvent the situation arising because of non-issue of the notice under section 143(2) of the Act within the stipulated time prescribed under the Act. As per the Ld. Authorized Representative for the assessee, the notice under section 143(2) of the Act was to be issued upto 31.09.2008, which admittedly in the present case had not been done. Consequently, notice under section 148 of the Act was issued on 14.01.2011 by the Assessing Officer, in order to rectify the said error by way of reopening the assessment. The second content ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive for the assessee further pointed out that comparative chart of important dates and events vis-à-vis the facts of the present case were similar to the facts before the Tribunal in Maximize Learning (P.) Ltd. vs. ACIT (supra). It was pointed out by the Ld. Authorized Representative for the assessee that the re-assessment proceedings under section 147/148 of the Act were initiated in relation to assessment year 2007-08 in both the cases. The return of income was filed by the assessee on 18.10.2007 whereas the return of income by Maximize Learning (P.) Ltd. was filed on 05.11.2007. It was further pointed out that in both the cases no intimation under section 143(1) of the Act was served upon the assessee. Further, as in the case of the assessee the last date for issue of notice under section 143(2) of the Act in the case of Maximize Learning (P.) Ltd. vs. ACIT (supra) was on 30.09.2008 and in both the cases for such non-issue of notice under section 143(2) of the Act within the prescribed period, the assessment gets barred by limitation on 31.03.2010. The Ld. Authorized Representative for the assessee further pointed out that the reference of the case was made by the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he TPO dated 29.10.2010 u/s 92CA(3) of the Act which is nonest and void ab initio. The fundamental point canvassed by the appellant is that the reference u/s 92CA made by the Assessing Officer to the TPO for computing the arm's length price was invalid because when the reference was made on 14.09.2009, no assessment proceedings were pending in relation to the instant assessment year. 12. At this stage, it would be appropriate to consider whether the reference made by the Assessing Officer to the TPO on 14.09.2009 for determination of arm's length price is valid or not ? For the said purpose, we may briefly touchupon the relevant provisions relating to the transfer pricing assessment which are contained in sections 92 to 92F of the Act under Chapter - X relating to the "Special Provisions Relating To Avoidance Of Tax". Sections 92 to 92F of the Act were introduced by the Finance Act, 2001 and are effective from the assessment year 2002-03. Section 92(1) of the Act provides that any income arising from an international transaction between associated enterprises shall be computed having regard to the arm's length price. Sections 92A and 92B of the Act contain provisions rela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gth price in relation to an international transaction to the TPO. In such a situation, the TPO, after taking into account the material before him, pass an order in writing u/s 92CA(3) of the Act determining the arm's length price in relation to an international transaction. On receipt of this order, sub-section (4) of section 92CA of the Act requires the Assessing Officer to compute the total income of the assessee in conformity with the arm's length price so determined by the TPO. In other words, the determination of the arm's length price, wherever a reference is made to him, is done by the TPO under sub-section (3) of section 92CA but the computation of total income having regard to the arm's length price so determined by the TPO is required to be done by the Assessing Officer under sub-section (4) of section 92C, read with sub-section (4) of section 92CA. 14. In sum and substance, the scheme of the Act postulates that arm's length price in relation to an international transaction is determined either by the Assessing Officer as provided in sub-section (3) of section 92C or by the TPO u/s 92CA(3) of the Act where a reference is made to him by the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction arises only during the assessment proceedings, wherein he is determining the total income of the assessee. The appellant has canvassed the aforesaid position before us and in this context reference has also been made to the CBDT Instruction No.3 dated 20th May, 2003 the relevant portion of which read as under :- "..........The Central Board of Direct Taxes, therefore, have decided that wherever the aggregate value of international transaction exceeds Rs. 5 crores, the case should be picked up for scrutiny and reference under section 92CA be made to the TPO. If there are more than one transaction with an associated enterprise or there are transactions with more than one associated enterprises the aggregate value of which exceeds Rs. 5 crores, the transactions should be referred to the TPO. Before making reference to the TPO, the Assessing Officer has to seek approval of the Commissioner/Director as contemplated under the Act. Under the provisions of section 92CA reference is in relation to the international transaction. Hence all transactions have to be explicitly mentioned in the letter of reference. Since the case will be selected for scrutiny before making reference to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reference to the TPO. However, it is submitted that the CBDT norms also provide that a case which is not directly covered under the aforesaid compulsory scrutiny norm, can also be selected for scrutiny if the Assessing Officer records a satisfaction and seeks the approval of the CCIT/DGIT (International Taxation)/DGIT (Exemption). The aforesaid norm has been pointed out to say that in order to pick-up a case for scrutiny, some satisfaction is required to be recorded before the notice u/s 143(2) of the Act is to be issued. This exercise, according to the Ld. CIT-DR, could very well be the reference of the matter of the TPO, therefore, the stipulated period laid down by the CBDT does not pre-suppose that the issue of notice u/s 143(2) of the Act has to be necessarily and without fail precede the reference to TPO. 19. We have carefully considered the plea of the Ld. CIT-DR, that it is open to the Department to make a reference to the TPO without issuing notice u/s 143(2) of the Act, but in our view, it is not supported by a schematic reading of the relevant Provisions relating to the transfer pricing assessment contained in sections 92 to 92F. The entire purpose of computation of ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny assessment proceedings pending before a reference to the TPO can be made for computation of arm's length price in relation to an international transaction. In this context, reference has been made to the phraseology of section 92CA(1) of the Act to say that only two conditions are prescribed therein which are to be fulfilled by the Assessing Officer before referring the matter to the TPO. Firstly, assessee should have entered into international transaction; and, that if the Assessing Officer considers it necessary and expedient to do so, he may refer the matter to the TPO under approval of the Commissioner. If both the conditions are satisfied there is no bar or requirement of any assessment proceedings being pending, before the reference is made to the TPO. 22. The aforesaid plea of the Ld. CIT-DR also, in our view, fails to take into consideration the entire scheme envisaged for the transfer pricing assessment in sections 92 to 92F of the Act. The provisions of sections 92 to 92F of the relate to computation of income from the international transaction having regard to the arm's length price, meaning of associated enterprises, meaning of international transaction, de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and after taking into account the material available with him, passed an order dated 29.10.2010 determining the arm's length price in accordance with sub-section (3) of section 92CA of the Act. 25. In the background of the above facts, it needs to be established as to whether on 14.09.2009 when the Assessing Officer made a reference to the TPO u/s 92CA(1) of the Act, was there an assessment proceedings u/s 143 of the Act pending for the year under consideration. In the present case, we are dealing with assessment year 2007-08 and assessee filed its return of income on 05.11.2007. In terms of clause (ii) to sub-section (2) of section 143 of the Act, as it stood at the relevant point of time, notice u/s 143(2) of the Act in order to subject the return of income to scrutiny assessment, should have been issued within this six months from the end of the relevant assessment year i.e. upto 30.09.2008. There is no dispute that no such notice has been issued within the above stipulated period. A consequence of the aforesaid situation is that the return of income filed by the assessee on 05.11.2007 became final as no scrutiny proceedings were started within the period stipulated in law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roceedings pending, and therefore it was an invalid reference. Consequently, the subsequent order passed by the TPO on 29.10.2010 (supra) determining the adjustment of Rs. 2,49,48,811/- to the international transaction is a nullity in law and void ab initio." 14. Another aspect noted by the Tribunal was whether in the above said circumstances the order of the TPO could be valid material for the Assessing Officer to entertain a belief that certain income chargeable to tax has escaped assessment within the meaning of section 147 of the Act. It was held by the Tribunal that the reasons recorded by the Assessing Officer in the present case do not meet the requirement of section 147 of the Act and therefore the Assessing Officer had no jurisdiction to issue notice under section 148 of the Act dated 14.01.2011 and as a consequence, the subsequent assessment order passed under section 143(3) r.w.s. 147 and 144C(3) of the Act was liable to be quashed. The relevant observations of the Tribunal (supra) are in paras 28 to 35, which are as under :- "28. The next aspect is as to whether, in the above circumstances, the order of the TPO dated 29.10.2010 (supra) can be a valid material for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 2,49,43,811/- was required to be made to the stated values of the international transaction. Therefore, the aforesaid material provided a good ground for the Assessing officer to formulate a belief that certain income chargeable to tax had escaped assessment. 31. At the outset, we may notice that the validity of the notice reopening the assessment u/s 148 of the Act has to be determined on the basis of the reasons which are disclosed to the assessee. Those reasons constitute the foundation of the action initiated by the Assessing Officer of reopening the assessment. The averments made by the Ld. CIT-DR regarding the compulsory scrutiny of returns which involved international transactions and/or that the Form No.3CEB was not filed with the Assessing Officer, are reasons which are not finding a place in the reasons recorded by the Assessing Officer for re-assessment. The reasons recorded by the Assessing Officer for re-assessment, have already been reproduced by us in the earlier part of this order. It's a trite law that the reasons recorded by the Assessing Officer are alone to be examined so as to test their validity. In this context, a reference can be made to the judgement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Ld. CITDR based on the judgement of the Hon'ble Supreme Court in the case of Pooran Mal (supra). It is quite well-settled that any illegality or irregularity in obtaining material or evidence would not preclude the Revenue authorities from utilizing the same in assessment of income unless the genuineness and correctness of the material or evidence is in doubt. So however, in the present case, we are not dealing with the power of the Assessing Officer to compute income of the assessee arising from an international transaction based on the arm's length price determined by the TPO. Indeed, as we had seen earlier the computation of total income from an international transaction has to be done by the Assessing Officer under sub-section (4) of section 92C read with sub-section (4) of section 92CA of the Act having regard to the arm's length price determined by the TPO. There is no dispute on the said aspect. In the present case, the point made out by the assessee is that a nonest and void ab initio order passed by the TPO on 29.10.2010 determining the arm's length price u/s 92CA(3) of the Act cannot form a basis to formulate a belief that certain income chargeable to ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to assessment year 2002-03. Pertinently, in the period prior to assessment year 2002-03, the un-amended provisions of section 92 of the Act did not provide for an order by the TPO determining arm's length price. The assessee attacked the initiation of proceedings u/s 147/148 of the Act for a period prior to assessment year 2002-03 contending that the order of the TPO passed under Chapter X subsequent to the amendment made with effect from 01.04.2002 in respect of a subsequent assessment year was irrelevant. In other words, assessee canvassed that the order of the TPO in respect of a subsequent assessment year could not be a ground to reopen the assessment of a year which was prior to the amendment of section 92 of the Act with effect from 01.04.2002. The Hon'ble High Court disagreed with the assessee's defense and upheld the action of the Assessing Officer in taking into account the subsequent order of the TPO for forming a belief that certain income liable to tax had escaped assessment even in relation to an assessment year prior to the insertion of 92CA of the Act with effect from 01.04.2002. As per the Hon'ble High Court, the order of the TPO could certainly have nexus for r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he international transaction. Consequently, order passed by the TPO under section 92CA(3) proposing an adjustment of Rs. 1,25,17,115/- to the arm's length price of the international transaction was a nullity in law and void ab initio. In view of the above-said facts and circumstances, such an order passed by the TPO was not a valid material for the Assessing Officer to entertain a belief that certain income chargeable to tax had escaped assessment within the meaning of section 147 of the Act. Consequently, we hold that the reasons recorded for reopening the assessment under section 147 of the Act do not meet the requirements of the section and hence the Assessing Officer had no jurisdiction to issue notice under section 148 of the Act. Consequently, the subsequent order passed by the Assessing Officer under section 143(3) r.w.s. 147 and 144C of the Act is liable to be quashed. Accordingly, we hold so. The ground of the appeal No.1 raised by the assessee is allowed. 16. As the preliminary issue raised by the assessee regarding the assumption of jurisdiction by the Assessing Officer has been decided in favour of the assessee and the impugned assessment has been quashed, the rema ..... 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