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2016 (10) TMI 326 - PUNJAB AND HARYANA HIGH COURT

2016 (10) TMI 326 - PUNJAB AND HARYANA HIGH COURT - [2016] 389 ITR 385 - Penalty under section 271(G)- existence of international transaction - Reference to TPO - Held that:- In view of the fact that the reference to the TPO has already been made after obtaining the approval of the Pr.CIT the objection raised by the petitioner may be taken before the DRP or the CIT(A) as the case may be. It is necessary, however, now to consider the nature of the order to be passed. As the provisions of the Act .....

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he CIT(A) as the case may be ought to first adjudicate the question as to whether the said transactions are international transactions or not. If they come to the conclusion that they are not international transactions, certain consequences may follow which we keep open for the petitioner to take before the DRP or the CIT(A) as the case may be. We clarify that in the event of the CIT(A) or the DRP coming to the conclusion that they are international transactions, it would not be necessary for th .....

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mposing penalty, if any, shall not be implemented till the decision of the DRP or the CIT(A) as the case may be on the preliminary issue as to whether it is an international transaction or not. - Civil Writ Petition No. 13613 of 2016 (O&M) - Dated:- 3-10-2016 - MR. S.J.VAZIFDAR AND MR. DEEPAK SIBAL, JJ. For The Petitioner : Ms. Radhika Suri, Senior Advocate with Ms. Rinku Dahiya, Advocate For The Respondent : Mr. Rajesh Sethi, Advocate and Ms. Pridhi Jaswinder Sandhu, Advocate S.J.VAZIFDAR, CHIE .....

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ere not applicable to the international transactions undertaken by the petitioner as they were not with its associated enterprises within the meaning of that expression in the Act. It is contended, therefore, that the entire proceedings including the reference to the TPO for the assessment year 2011-12 is without jurisdiction and void. 3. By our interim order dated 29.08.2016 we recorded Ms. Radhika Suri s statement that the petitioner would only raise legal submissions to the effect that before .....

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rprise 92A. (1) For the purposes 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 or capi .....

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ssment proceedings under sections 153A, 153C and 142(1) of the Act and stated that during the course of a survey of the petitioner s premises various documents were found and impounded. The notice further stated that the petitioner had made sales to its group companies M/s Haryana Trading Company, Dubai managed by one Kushal Mittal and M/s Indian Treat Pvt. Ltd. Singapore managed by one Sunny Mittal; that the sales to the sister concern were under invoiced with a view to evading tax and that pro .....

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l course of business and were personal transactions with one Adarsh Kumar and M/s Vashudev Trading Company and that said Kushal Mittal was not directly or indirectly related to either the said Adarsh Kumar or M/s Vashudev Trading Company. Adarsh Kumar and M/s Vashudev Trading Company were shown in the bank statements tabulated in the show cause notice. It was further stated that neither M/s Haryana Trading Company, Dubai nor M/s Indian Treat Pvt. Ltd. Singapore were the petitioner s associate en .....

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nt No.2. i.e. the TPO informed the petitioner that he had received a reference under section 92CA(1) of the Act from respondent No.1 to determine under section 92CA(3) the arm s length price in respect of international transactions/specified domestic transaction entered into by the petitioner during the financial year 2010-11 corresponding to the assessment year 2011-12. The petitioner was called upon to produce the evidence and/or material relied upon by it in support of its computation of the .....

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terprise and accordingly it was not required to submit the Form No.3CEB. The letter further stated that a copy of the reference had not been supplied to the petitioner. The petitioner by its Chartered Accountant s letter dated 27.05.2016 addressed to the TPO, which was in continuation of the earlier letter dated 30.04.2016 referred to its objections to the show cause notice, the contentions raised therein and requested for a copy of the reference by the first respondent to him and a personal hea .....

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inating documents found and seized during the search. The satisfaction note further records as follows. ₹ 33 crores were surrendered. However, complete taxes on the said undisclosed income had not been paid. The petitioner and its group were not cooperating in the assessment proceedings. The petitioner had under invoiced its sales to its said group companies/sister concerns with a view to evading tax. A comparative chart tabulating the export sales to the sister concerns were set out. Prof .....

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managed the Haryana Trading Company, Dubai is the son of Vishnu Bhagwan Mittal, a key person as well as the Managing Director/promoter of the petitioner. The sales by the petitioner to the sister concern were at very low rates and the sister concern in turn sold the same at much higher rates and the income generated thereby found its way back to India and was invested in properties by the members of the group. Instruction No.3/2016 dated 10.03.2016 issued by the Central Board of Direct Taxes wa .....

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ere are no international transactions must be taken in the proceedings and before the authorities under the Act. It is not a fit case to entertain them in a writ petition under Article 226 of the Constitution of India. 13. Respondent No.1 by his letter dated 23.03.2016 addressed to the Principal, Commissioner of Income Tax, set out all that he had recorded in the satisfaction note as well as the petitioner s reply/objections to the same. He also dealt with the petitioner s contention that the Du .....

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-15. The Principal, Commissioner of Income Tax by his letter dated 28/29.03.2016 gave the necessary permission. 14. Ms. Suri s submissions are as follow:- I) In terms of the instructions given by the CBDT circular dated 10.03.2016, the requirement of passing a reasoned order on the objections regarding whether a transaction is an international transaction or not and the service of the order upon the assessee is a condition precedent to the Assessing Officer making a reference to the Transfer Pri .....

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to decide the issue of objection to applicability of chapter X, if raised by the assessee, before referring the transaction to the TPO as it is a basic issue and would prevent loss of man hours on both sides in computing the ALP if it is finally concluded that Chapter X is not applicable. We are of the view that this exercise could also be done by the Assessing officer before he determines the ALP in exercise of his powers under Section 92C(3). It was Mr. Nani Palkhiwala who in the concluding pa .....

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be natural for the petitioner to feel harassed as the Assessing Officer did not give any opportunity of hearing before making a reference to the TPO and none of the two authorities viz. the TPO and the Assessing Officer dealt with its preliminary objection. The TPO does not deal with the petitioner's objection about applicability of Chapter X, on the ground that it would be dealt with by the Assessing officer. Thereafter when the petitioner raises the same issue before the Assessing Officer .....

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as also before determining the arm s length price himself. To the reasons furnished by the Bombay High Court for this view we venture to add reasons of our own. 18. In another case of Vodafone India Service Pvt. Ltd. v. Union of India and others [2013] 359 ITR 133 (Bombay) a Division Bench of the Bombay High Court (to which one of us S.J.Vazifdar, J. was a party) held that where a reference is made under section 92CA(1), the Transfer Pricing Officer must determine the arm s length price of the t .....

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the arm's length price, including the question whether the transaction is an international transaction or not. 66. The AO has jurisdiction to consider any international transaction and to determine the arm's length price thereof. This is clear from sections 92C and 92CA. The AO has the power to tax all income under section 4 of the Act. He has the power to determine whether a transaction is an international transaction and to determine the arm's length price thereof under section 92 .....

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e. The exercise of power by the AO on the one hand and the TPO under sections 92C and 92CA on the other are a different matter and of considerable general importance. 67. The AO may, in exercise of his discretion under section 92CA and with the previous approval of the Commissioner, refer the computation of the arm's length price in relation to an international transaction under section 92C to the TPO. In such a case, the TPO would be bound to determine the arm's length price in respect .....

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is an international transaction. The remedy of the assessee to question the TPO's decision would be before the Commissioner of Income-tax or the Dispute Resolution Panel as we will shortly indicate and thereafter before the ITAT. The provisions of the Act do not indicate that the Legislature intended conferring upon the TPO the jurisdiction to effectively sit in appeal over the decision not merely of the AO, but of the Commissioner as well. The explanation to section 92CA provides that for t .....

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Commissioner. In this regard, we are in respectful agreement with the judgment of a Division Bench of the Gujarat High Court in Veer Gems v. Assistant Commissioner of Income Tax (2012) 246 CTR (Guj.) 352. 68. Thus, where a reference is made under section 92CA (1), the TPO must determine the arm's length price of the transaction and in doing so, he would not be entitled to consider the question as to whether the transaction referred to him is an international transaction or not. 19. In a cas .....

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s would have the benefit of the case of the Revenue and of the assessee. However, if the Assessing Officer decides to refer the determination of the arm s length price to the TPO without affording the assessee an opportunity of being heard and without deciding the objections, as to whether the transaction is an international transaction or not, the assessee would be severely prejudiced for it would then not have had an opportunity of having this objection even considered once the reference is ma .....

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ion is or is not infact an international transaction. The first opportunity that the assessee would in such a case have to raise a contention that the transaction is not an international transaction would be before the Disputes Resolution Panel (DRP) or the CIT(A) as the case may be. These are in effect appellate proceedings where the appellate or the higher authority CIT(A)/DRP would have to consider the issue with the benefit of the case of the department as well as of the assessee for the fir .....

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ts and even further material. 20. Further in respect of international transactions, an assessee must maintain certain information. Section 92D provides that every person who has entered into an international transaction or specified domestic transaction shall keep and maintain such information and document in respect thereof, as may be prescribed. Rule 10D of the Rules stipulates the information and documents to be kept by the assessee in respect of an international transaction or a specified do .....

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in the prescribed form duly signed and verified in the prescribed manner by such accountant and setting forth such particulars as may be prescribed. Rule 10E in turns provides that the report from the accountant required to be furnished under section 92E shall be in Form- 3CEB. 21. The failure to furnish the information invites penal consequences under section 271G of the Act. An assessee who fails to furnish the information or documents as required by section 92D(3) may be directed by the Asses .....

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. It is only fair then that an assessee is given an opportunity of being heard on the question as to whether a transaction entered into by it is an international transaction or not. 23. It does occur to us that it could be said that the opportunity of raising objections and being heard on this issue ought to be granted by the Principal, Commissioner of Income Tax (Pr.CIT) for it is the Pr.CIT who ultimately grants or refuses the approval to refer the transaction to the Transfer Pricing Officer f .....

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f Direct Taxes dated 10.03.2016 containing guidelines for implementation of the Transfer Pricing Provisions. The same is applicable to both international transactions and specified domestic transactions between associate enterprises. Ms. Suri relied upon the following provisions in the circular:- 3. Reference to Transfer Pricing Officer (TPO) 3.1 The power to determine the Arm s Length Price (ALP) in an international transaction or specified domestic transaction is contained in sub-section (3) o .....

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-transfer pricing risk parameters but also having international transactions or specified domestic transactions, shall be referred to TPOs only in the following circumstances: (a) where 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 92E at all or has not disclosed the said transactions in the Accountant s report filed; (b) where there has been .....

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be referred by the AO to the TPO in accordance with paragraphs 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 to the TPO for determination of the ALP: • .....

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ternational 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 effect that the said transactions are not international transactions or specified domestic transactions or they do not impact the income of the taxpayer. In the above three situations, the AO must provide an opportunity of being heard to the taxpayer before recording his satisfaction or otherwise. In case no objection is raised b .....

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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 . (emphasis supplied). 25. Admittedly, in the present case there was a search and seizure operation at the petitioner s premises and it is the respondent(s) case that the petitioner has not filed the accountant s report under section 92E. The petitioner s case, therefore, falls within paragr .....

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aragraphs 3.2 and 3.3 in respect of transactions having the following situations meaning thereby the three situations immediately following and identified by the marks . . 27. The circular further provides that in such cases the Assessing Officer must record his satisfaction . The words used are record his satisfaction which indicate firstly that the Assessing Officer must reduce his satisfaction in writing and secondly he must furnish reasons for the same. That the satisfaction is to be in writ .....

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e TPO. Whether the allegations are true or not must be tested before the authorities under the Act and not in a Writ Petition under Article 226. The challenge on this ground is, therefore, unsustainable. 29. This brings us to Ms. Suri s second submission, namely, that the order recording satisfaction upon which the Principal, Commissioner of Income Tax, grants permission, must be served upon the assessee. We agree. The purpose of this exercise of granting the assessee an opportunity of raising o .....

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sputes Resolution Panel or the Commissioner of Income Tax(Appeals) as the case may be, and thereafter before the Income Tax Appellate Tribunal. 30. The matter, however, does not end here for the respondents have complied with all these requirements. The respondents have produced the satisfaction without the Pr.CIT approval for the reference. Ms. Suri, however, contends that the satisfaction that was recorded by the first respondent has not been served upon the assessee. She submits that where th .....

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o challenge the same before the Commissioner of Income Tax (Appeals) or the Disputes Resolution Panel, as the case may be. An assessee is not entitled as a matter of right to invoke the writ jurisdiction at the stage of reference by the Assessing Officer to the TPO. His grievances can be raised in a challenge to the draft assessment order before the Disputes Resolution Panel or the final assessment order before to the Commissioner of Income Tax (Appeals). The requirements of the rules of natural .....

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i s question as to what if the satisfaction note is not furnished at all is obvious. The assessee can always apply for the same either before the authorities and failing which by filing a writ petition. 33. The contention that the reference is void ab initio on account of the satisfaction note not having been furnished to the assessee before the reference of the transaction by the Assessing Officer to the TPO is, therefore, rejected. The failure to supply the satisfaction note before the referen .....

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e writ petition. In view of the fact that the reference to the TPO has already been made after obtaining the approval of the Pr.CIT the objection raised by the petitioner may be taken before the DRP or the CIT(A) as the case may be. It is necessary, however, now to consider the nature of the order to be passed. As the provisions of the Act and of the circular have not been complied with strictly and the matter already stands referred to the TPO it is necessary to protect the petitioner in certai .....

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the conclusion that they are not international transactions, certain consequences may follow which we keep open for the petitioner to take before the DRP or the CIT(A) as the case may be. We clarify that in the event of the CIT(A) or the DRP coming to the conclusion that they are international transactions, it would not be necessary for them to stall the proceedings and they may proceed to decide them finally. To this extent, our order is at a variance with the directions issued by the Bombay H .....

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