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2016 (8) TMI 151 - DELHI HIGH COURT

2016 (8) TMI 151 - DELHI HIGH COURT - [2016] 386 ITR 665 - ALP determination - non affording the Petitioner an opportunity of being heard - Held that:- Assessee has not filed the Accountant’s report under Section 92E of the Act. Yet the AO has to proceed to determine the ALP under Section 92C (3) of the Act or refer the matter to the TPO to determine the ALP under Section 92CA (1) of the Act in case the Assessee has not declared one or more international transactions in the report filed under Se .....

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en in the present case where a reference was earlier made by the AO to the TPO on 31st March 2013 and thereafter. - Thus the Court is of the view that the three references made by the AO to the TPO on the question of determination of ALP of the alleged international transactions involving the Petitioner and its AE have been made without affording the Petitioner an opportunity of being heard as was required by law. This, as explained by the Bombay High Court in Vodafone India Services (P) Lim .....

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RI JJ. Petitioner Through: Mr. Ajay Vohra, Senior Advocate with Ms. Kavita Jha and Mr.Vaibhav Kulkarni, Advocates. Respondents Through: Mr. Ashok K. Manchanda, Senior Standing Counsel. O R D E R Dr. S. Muralidhar, J. 1. These three writ petitions involve a common but interesting question of law regarding the procedure adopted by the Assessing Officer ( AO ) while referring to the Transfer Pricing Officer ( TPO ) under Section 92 CA of the Income Tax Act, 1961 ( Act ) the question of determinatio .....

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IL ], entered into transactions of import of raw material amounting to ₹ 196.48 crores from Indorama Petrochem Limited (IPL), a company incorporated in Thailand. For the AY 2010-11 the Petitioner filed its return of income on 15th October 2010 declaring Nil income after setting off the brought forward losses. The Petitioner s case was picked up for scrutiny and notices under Section 143 (2) and Section 142 (1) of the Act were issued. In terms of Section 153 of the Act, the assessment proce .....

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of February 2013, the AO required the Petitioner to explain why the transfer pricing (TP) provisions contained in Chapter X of the Act, i.e., Sections 92CA to 92F should not be made applicable in respect of transactions of import of raw materials amounting to ₹ 196.48 crores from IPL. 4. By a reply dated 26th February 2013 the Petitioner pointed out that IPL was not an AE of the Assessee as defined in Section 92A of the Act. The Petitioner confirmed that both the companies are separate com .....

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1 for determination of ALP in relation to the international transactions undertaken by the Petitioner with AEs during AY 2010-11. The letter dated 31st March 2013 issued by the AO reads as follows: Kindly refer the above. Please refer to the 3CD report and the other financial accounts filed by you in this office during the assessment proceedings of AY 2010-11 wherein it is noted that you have not filed the Transfer Pricing report under Section 92E of the I.T. Act, 1961 in this office which was r .....

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O under Section 92 CA of the Act. 7. It requires to be noticed at this stage that for AYs 2011-12 and 2012-13, similar references were made by the AO to the TPO for determination of the ALP of an alleged similar international transaction involving the Assessee and its AE. The stand of the Petitioner Assessee qua the references for the said two years was the same. While the subject matter of Writ Petition (Civil) No. 6422 of 2013 is the reference dated 31st March 2013 by which the AO referred to .....

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the Petitioner under Section 92CA (2) and 92D (3) of the Act. The issue in all the writ petitions is common. Submissions of learned counsel 8. Referring to Instruction No. 3 of 20th May 2003 issued by the Central Board of Direct Taxes ( CBDT ), Mr. Ajay Vohra, learned Senior counsel appearing for the Petitioner, submits that the AO was required to arrive at a prima facie determination on the basis of the details provided in the Accountant s report in Form 3 CEB containing the basic details of t .....

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39;necessary and expedient' to refer the matter to the TPO and that too only after giving the Petitioner an opportunity of being heard. 9. Reliance is placed on the decision of the Bombay High Court in Vodafone India Services (P) Limited v. Union of India (2014) 361 ITR 531 (Bom) where it was held that such a requirement of giving the Petitioner hearing prior to making a reference under Section 92CA of the Act has to be read into Section 92C A (1) in a case where the very jurisdiction of the .....

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47 of the Act, the Supreme Court has in GKN Driveshafts (India) Limited v. Income-tax Officer (2003) 259 ITR 19 (SC) mandated a hearing to an Assessee in regard to the objections filed to the re-opening of the assessment. Likewise, for the purposes of Section 92 CA (1) of the Act the Assessee who has raised an objection ought to be heard by the AO prior to the making of the reference the Petitioner. 10. Countering the above submissions it was urged by Mr. Ashok Manchanda, learned Senior standing .....

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hough the order of the AO making a reference to the TPO does not itself record that the AO considers it necessary or expedient to make a reference, it must be taken that the AO had come to that conclusion. Further, there was no need, according to Mr. Manchanda, for the AO to deal with the objections raised by the Assessee. He submitted that no prejudice would be caused to the Assessee if the TPO were to proceed with the reference made by the AO. The Assessee would in any event be heard by the TP .....

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31st March 2013. Discussion and Reasons 12. To begin with it is required to be noticed that Chapter X contains provisions regarding determination of ALP of international transactions and specified domestic transactions. While Section 92C talks of computation of ALP, Section 92BA defines a specified domestic transaction. For the purpose of the present petitions, it is not necessary for the Court to examine if in fact the Petitioner did enter into an international transaction and whether IPL could .....

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ternational transaction or specified domestic transaction in any previous year, and the Assessing Officer considers it necessary or expedient so to do, he may with the previous approval of the Principal Commissioner or Commissioner, refer the computation of the arm s length price in relation to the said international transaction or specified domestic transaction under Section 92C to the Transfer Pricing Officer. (2) Where a reference is made under sub-Section (1), the Transfer Pricing Officer sh .....

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cing 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 .....

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notice under sub-Section (2), or as soon thereafter as may be, after hearing evidence as the Assessee may produce, including any information or documents referred to in subsection (3) of Section 92D and after considering such evidence as the Transfer Pricing Officer may require on any specified points and after taking into account all relevant materials which he has gathered, the Transfer Pricing Officer shall by order in writing, determine the arm s length price in relation to the internationa .....

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threshold objection that it has not entered into any international transaction within the meaning of Section 92B of the Act, it is imperative for the AO to deal with such an objection. If the AO decides to nevertheless make a reference, he has to record the reasons, even prima facie, why he considers it necessary and expedient to make such a reference to the TPO. 15. What is referred to the TPO is the determination of the ALP of the said international transaction or specified domestic transacti .....

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the ALP of such international transaction involving the Assessee. 16. CBDT s Instruction No. 3 of 2003 categorically states that in order to make a reference to the TPO, the AO has to satisfy himself that the Assessee has entered into an international transaction with its AE. One of the sources from which the factual information regarding the international transaction can be gathered is Form No. 3 CEB filed with the return which is in the nature of an Accountant s report containing the details .....

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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 Ass .....

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s to record that he considers it necessary and expedient to make a reference. The AO has to deal with the objections raised by the Assessee. It is only thereafter that the AO can come to the conclusion, even prime facie, that it is necessary and expedient to make the reference. This has to be done prior to making a reference. 18. The further issue as far as the procedure to be followed is whether the AO is obliged to give the Assessee an opportunity of being heard prior to making the reference w .....

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l transaction. Also the ALP of the shares so issued, was determined. However, a notice was appended by the Accountant stating that the transaction of issue of equity shares did not affect the income of the Assessee and was being reported only as a matter of abundant caution. 19.2 The return was picked up for scrutiny by the AO. Thereafter, the AO, after obtaining the previous approval of the Commissioner of Income Tax ( CIT ) referred all the transactions reported in Form 3 CEB to the TPO under .....

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ce, 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 ). Objections were raised on .....

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r potentially arising and/or affected by an International Transaction for the purpose of application of Chapter X. This would appear to be in the nature of jurisdictional requirement and the Assessing Officer must be satisfied that there is an income or a potential of an income arising and/or being affected on determination of an ALP before he proceeds further in determining the ALP or referring the issue to the TPO to determine the ALP. In this case, we find that the Petitioner has from the ver .....

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e TPO in the impugned order dated 28th January 2012 meets the Petitioner s objection by stating that the same would be dealt with by the Assessing Officer. However, when the same objection was raised before the Assessing Officer post the order of the TPO, the Assessing Officer does not consider the same in the impugned draft assessment order dated 22nd March 2013 on the ground that in view of Section 92CA (4), the Assessing Officer is obliged to pass an order in conformity with the ALP determine .....

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issue must be decided. Such an issue must be dealt with at the very threshold that is before determination of ALP. This is so because in case it is held that in the International Transaction there is no income or potential of any income arising and/or being affected on determination of an ALP, the entire exercise of determining the ALP would become academic. In terms of Section 92CA (4), the Assessing Officer is bound to pass an order in conformity with the ALP determined by the TPO as held by .....

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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 determ .....

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e Bombay High Court further explained the consequence of hearing being given to the Assessee by the AO before making a reference to the TPO and observed in para 40, as under: 40. In our view, once the AO gives hearing to the Assessee before making a reference to TPO, the TPO would be bound by formation of opinion of AO that there was international transaction in the relevant year and that income arises or is affected by the international transaction and the TPO is bound to determine the ALP of t .....

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may add a caveat and that is: where the Assessee objects to the jurisdiction under Chapter X being exercised then hearing is required to be given by the Assessing Officer to the Assessee to consider whether it is necessary and expedient to refer the matter to the TPO as otherwise this objection would never be considered, as pointed out above and as in fact has happened in this case. In such cases where the applicability of Chapter X to the facts of the Assessee s case is objected to, a hearing s .....

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n 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 10th 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 .....

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n by it come to the notice of the AO; (b) where the taxpayer has not declared one or more international transaction or specified domestic transaction in the Accountant s report filed under Section 92E of the Act and the said transaction or transactions come to the notice of the AO; and (c) where the taxpayer has declared the international transactions or specified domestic transactions in the Accountant s report filed under Section 92E of the Act but has made certain qualifying remarks to the ef .....

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for determining the ALP after obtaining the approval of the PCIT or CIT. However, where applicability of Chapter X [Section 92 to 92F] to these three situations is objected to by the taxpayer, the AO must consider the taxpayer s objections and pass a speaking order so as to comply with the principles of natural justice. If the AO decides in the said order that the transaction in question needs to be referred to the TPO, he should make a reference after obtaining the approval of the PCIT or CIT. .....

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nity of being heard to the taxpayer before recording his satisfaction or otherwise. 22. Although Mr. Manchanda tried to contend that the above instruction of the CBDT was prospective, in the considered view of the Court, the above CBDT s Instruction No. 15 of 2015 as replaced by CBDT Instruction No.3 of 2016 dated 10th March 2016 clarifies the correct legal position and cannot be construed as not applying to the facts on hand. Since it is a procedural aspect and is intended to the benefit to the .....

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