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TMI Blog2019 (7) TMI 173X X X X Extracts X X X X X X X X Extracts X X X X ..... tral Circle 2(1), Pune (i.e. "AO") and learned DRP-3, Mumbai (i.e. "DRP") and the learned DCIT/ Transfer Pricing 1(1) (i.e. TPO) erred in law and on facts in determining taxable income of the appellant at Rs. 9,20,58,860 instead of income of Rs. 1,16,95,864 as per return of income, by making addition of Rs. 8,03,63,000 to the taxable income of the appellant. Powers of DRP & TPO 2.1 The learned DRP erred in law and on facts in benchmarking the international transactions of supply of goods reported in form no. 3CEB despite the fact that, the said transaction of supply of goods was not benchmarked by the learned TPO conspicuously. 2.2 The learned DRP ought to have appreciated that since, the learned TPO has taxed the global profits of SAVA group in Appellant's hands by lifting the corporate veil and by treating the global entities as sham / bogus and since, the said analogy of the learned TPO was disapproved / overruled by the learned DRP in Para-10.3 to Para-10.3.4 of the DRP order; no further any deliberations and additions are permissible in the DRP proceedings as per provisions of section 144C (8) & considering scheme of 1TA, 1961. 2.3 The learned DRP erred in law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in converting, equating the allegation of learned TPO as to "Control & Management from India" into some presumption/hypothetical services provided by the appellant to AE Parties. 4.3 The learned DRP erred in law and on facts in recording conflicting observations regarding TPO's allegation as regards "control and management from India" revealing from Para 5.3 to Para 5.3.2 as against Para 10.1.7.3 of the DRP order. Search material 5.1 The learned TPO / DRP / AO erred in law and on facts in not appreciating that, in a search based assessment, no any addition to the taxable income is plausible, in absence of any Incriminating Material found / seized during the course of search u/s 132 of ITA, 1961. 5.2 The learned I-T authorities erred in law and on facts in not appreciating that, the programmatic screenshots seized during search, were not found on, and seized from, computers of the appellant and as such, do not partake character of incriminating material. 5.3 The learned I-T authorities further erred on facts in not appreciating that the emails of various employees of other group companies in India, collected from third parties in post search enquiries, do not part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anies, then the average margin earned by appellant is well within +/- 5% permissible limit as envisaged by ITA, 1961. 7.4 The learned DRP erred in law and on facts in providing adjustment on account of marketing functions in an incorrect manner. 7.5 The learned DRP erred in law and on facts in not providing any working capital adjustment to the appellant. Residual Approach under PSM method 8.1 The learned DRP erred in law and on facts in working out the residual profits to be attributed to the appellant, considering each AE as a separate entity. The learned DRP erred on facts in testing each AE entity separately on the one hand; and; making FAR analysis of all the AEs on totality basis on the other hand. The learned DRP ought to have considered all the AEs together while working out residual profits. 8.2 The learned DRP erred in law and on facts in comparing PLI of the domestic comparable companies with PLI of AEs to determine the residual profits attributable to appellant. The learned DRP ought to have appreciated that, considering geographical distances, Indian comparable companies ought not to have been used for benchmarking quantum of residual profits of the AE e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4.3 on this issue along with modified ground of appeal No.1, which we shall deal with in the first instance. 6. Briefly, in the facts of the case, the assessee for the year under consideration had furnished the return of income on 30.10.2007 declaring total income of Rs. 1,16,95,864/-. Search action under section 132 of the Act was conducted on Sava group of cases on 31.10.2012. The assessee was covered as part of this group. Since warrant of authorization under section 132(1) of the Act was executed in the case of assessee, notice under section 153A of the Act was issued to the assessee and served upon the assessee. In response thereto, the assessee filed letter dated 21.06.2003 stating that the return of income filed under section 139(5) of the Act may be treated as return of income filed in response to notice under section 153A of the Act. The case of assessee was picked up for scrutiny. The Assessing Officer noted that since the assessee involved in international transactions with its foreign entities hence, after getting approval from CIT(C), Pune, case was referred to the TPO under section 92CA(1) of the Act for the purpose of determination of arm's length price of int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egard noted that Mr. Vinod Jadhav claimed the income as exempt on the ground that he was Non-resident. In assessment year 2010-11, Mr. Vinod Jadhav had received salary of Rs. 39.20 crores from AE's in Dubai and also claimed it as exempt. It was further noted by him that subsequently the Settlement Commission rejected the claim of Mr. Vinod Jadhav and declared him as Resident. In such backdrop, Search and Seizure under section 132 of the Act was carried out in the premises of group on 31.10.2012. The Investigation Team observed that affairs of these group companies revealed that the assessee was selling medicines and drugs from India to the customers in various parts of world using the route of Singapore. The proceeds of sale on such products were realized in the bank accounts of the companies registered in Mauritius / UAE. All of such sales to customers and various countries, as per the TPO, were artificially shown to be made by UAE based companies and income was shown to be earned by Mauritius / UAE based companies. He was of the view that this was done in order not to pay taxes, in India, on the huge profits earned in the business. Such profits were repatriated to the promote ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s on income were payable. The address of these companies were shown either as PO Box 9523, SAIF Zone Sharjah, UAE or PO Box 9562, SAIF Zone, Sharjah, UAE. The TPO noted that the companies were Free Zone Companies (FZC) formed under instructions issued by the Chairman of the General Authority of the Administration of Sharjah Free Zones and FZC company could be converted into Free Zone Establishment (FZE) as per Article 31 of the said Decree and it could be done only when number of shareholders were reduced to one only. The TPO was of the view that assessee had incorporated FZEs only when the said FZEs were incorporated as wholly owned subsidiaries of Anagha Pharma Pvt. Ltd. He was further of the view that group had been changing the corporate structure or the name of AE's in Dubai, almost every year. He then, enlisted the companies floated by assessee. Similar exercise was done in respect of concerns in Mauritius, wherein the first and main concern was SAVA Pharma Ltd., Mauritius. The TPO then in para 6 observed that in the above said background, the matter was referred by the Assessing Officer to his office to determine arm's length price of international transactions entered i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y emails or other online method, in India and these orders are processed in India only, ix) All sales are made by the assessee on CIF basis. No indirect taxes are levied on the export. x) The routing of bills through, Mauritius and UAE, is made in order to avoid payment of taxes, in India on the huge profits earned in this business. Such profits are repatriated by the promoter of the group Shri Vinod Jadhav in the guise of salaries, commission etc., and he has claimed the same as exempt by claiming himself to be non-resident Indian (NRI) for the F.Y. 2009-10. 10. The TPO on analysis of information, came to a finding that no activity was found to have been carried out either in Mauritius or UAE and hence, the Ld. AR was asked to submit details of employees of AE's in certain format. In reply, the assessee pointed out that it could not submit the said details as the AE companies were bound by confidentiality clause and hence, the details of employees could not be shared. However, on subsequent hearing, the assessee had submitted the names of employees, including the names of employees of contractor i.e. DHL Global. 11. The TPO vide para 10 refers to the finding of inves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uses in Singapore and Mauritius. This is generally done once in 15 days. The bills are raised on UAE based company as it is shown as the buyer and legal owner of the stocks in Singapore and Mauritius. However, it is a fact that all of this process is carried out by Pune based employees without any involvement of UAE based companies. iv) For some of the products, these are procured from Mauritius, Singapore and some other countries. The quantum of such procurements as per their purchase invoices is not much. v) The processed orders are available on JadePharma for which access was given to the warehouses. Based on the processed orders and the labels prepared and sent to these warehouses from Pune, the warehouse staff packs the goods in export packs and ships the same to the customers through the DHL Global mail. Some of the wholesale orders are shipped directly to the end customers from India by APPL. vi) The details about shipping are uploaded from the warehouses in JadePharma. Earlier, before they were connected to JadePharma, they used to upload such details in www.savaordersystem.biz. After the access of JadePharma was given to them, they are updating the details of ship ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... data was manually uploaded to www.savaordersystem.biz. xv) Tracking of the shipments. xvi) Solving the problems of the customers linked to tracking of the shipments and receipt of the orders- customer care, xvii) Ensuring that the orders are not processed if there is no confirmation of payment from the customer as all the payments are received In advance. xviii) Generation of various reports of UAE based companies like stock report sheet, sales report, purchase report, daily sates reports etc. xix) Generation of the sales invoices of UAE based companies xx) Control of accounting of UAE based companies. B) Singapore (Contractor DHL - as per agreement dated 01/02/2008): i) Maintenance of the stock in warehouses ii) Shipping of the products as per the addresses and particulars received from India iii) Updating the shipping data in JadePharma or sending such data to India based concerns iv) Procurement of medicines/products if the stock is depleted as per the directions of Shri Vinod Jadhav and India based concerns C) UAE and Mauritius based concerns: i) Maintenance of the bank accounts in which the payments are received in respect of the sales ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than receiving and sending money; that too, these functions were operated from India, using internet banking facilities. He thus, concluded that TNMM method was not most appropriate method for benchmarking such complex transactions, which as per him were designed to escape the legitimate taxation in India and which have been made with the sole intent of tax evasion. He thus, proposed that Profit Split Method was the best method to benchmark transactions undertaken by assessee with its AE's and the profits earned by them. He was of the view that not only the transactions were complex but its correct profitability in India could not be ascertained by using TNMM method as most appropriate method. He thus, proposed to benchmark international transactions of assessee by using Profit Split Method as most appropriate method. He referred to para 2.108 of Chapter II of OECD Guidelines, which provides the basics of Profit Split Method and also referred to para 2.111 and para 3.9 referred on para 2.108 of OECD guidelines and vide para 15.6 notes that provisions of Profit Split Method (PSM) under Income Tax Rules (in short 'the Rules'). The assessee in this regard was thus issued separate sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uyers and affiliates based all over the world. During the course of search proceedings, the assessee had consistently tried to show that orders were received through its AEs but since the assessee could not produce evidences in support, the TPO observed that there was no need for the orders to either originate from UAE or get routed through it. The epicentre of the process, as per him, was situated in software managed and controlled by the employees of SPL, Pune. He thus, did not accept the contention of assessee regarding receipt of orders from UAE being tenable and infructuous. He further observed that orders from customers received through e-mail attachments were then uploaded to JadePharma Ver.1.0 for processing; after the orders were processed for their accuracy and compliance and prescription attachments, these were sent to Supply Chain Management for fulfilment through shipping of ordered medicines / products. This sheet of processed orders containing various details of customers and suppliers including the quantity of products was exchanged through emails with the warehouses in Singapore and Mauritius, from where these shipments were to be shifted to the end customers. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntries and all the activities were carried out by assessee in India. As per him, it was therefore, conclusively proved that entire control and management of affairs of assessee was wholly situated in India. He then, referred to role of DHL and observed that actual delivery of goods to the customers had never been taken by AE in Dubai. The AE's in Dubai had taken the godown on rent and all activities of actual delivery were being outsourced to DHL vide agreement dated 01.02.2008, entered by Sava Trading FZE, Dubai with DHL. The TPO in this regard observed that agreement remained in force till 2012 but even after changing the AE or the name of AE's every year, this agreement had remained in force, which proved beyond doubt that real entity behind entire business was the assessee only and the AEs in Dubai and Mauritius were nothing but shell companies. Though the assessee explained that subsequent agreements were entered with DHL and the scope of DHL was reduced only to postal distribution services. However, copies of agreements were not filed. The TPO did not accept the said explanation of assessee. He reiterated by saying that AEs in Mauritius and UAE did not have any role to play e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain and functions of group was situated in India and minuscule work of receiving and sending money was left with the AEs in UAE and Mauritius. 17. The TPO then rejected TNMM method and thought it appropriate to benchmark the transactions by treating Profit Split Method as most appropriate method. During the course of TP proceedings, the assessee had submitted the copies of financials of AEs and also the detailed working of PLI of assessee and its AEs were also given. The TPO again observed that actual control and management of affairs of AEs was situated wholly in India, wherein the AEs had not incurred any further amount either of management or sale and marketing of the goods procured from India. In view of the findings, during the course of proceedings, the profit of assessee and AEs was proposed to be combined and split according to their functions, using Profit Split Method. The TPO then went on to observe that since the AEs had almost done no functions except receipt of sale proceeds and sending it to the assessee, the functions of AEs were treated as functions of banking agent, with no functions to be performed, except to receive the money of sale proceeds. It was thus, pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration and preparation of the bills and invoices No No No Yes Yes Maintenance of books of account Yes No Yes Yes Yes 18. The TPO further reiterated that since the AE's were not doing functions other than receiving and sending money which was similar to banking sector, for which not more than 2% to 3% would be charged as commission. He thus, proposed to allocate profits of assessee and AE's cumulated profits in the hands of assessee. He then, split up combined profit, wherein out of total profit of Rs. 157.23 crores earned over the years from assessment years 2007-08 to 2013-14, 97% was the profit allocated to assessee totalling Rs. 145 crores, to which profit attributable to assessee which was equal to comparables profit was added. The said table is reproduced hereunder for ready reference: A.Y. Combined Profit of Anagha and AE's % of Profit earned by the Comparab les. As per assessee' s T.P. Report Profit Attributable to the Anagha which is equal to the comparable' s profit % AE's Share 3% Residual Profit allocated to Anagha Pharma Ltd. Anagha's Total Profit A B C D (B*C%) E (B*3%) F (B-D-E) G (D+F) 2007-08 2,28,44,905 2.77 6,32,8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that arm's length price of supply of goods could not be determined by applying OP/OR of AEs as PLI. Therefore, the TPO was to get the transactions of supply of goods to AE benchmarked applying appropriate method and determine arm's length price of the transactions. In the case of assessee, the Panel noted the order of TPO, wherein it was mentioned that all functions except banking were done by assessee itself. In this regard, he was directed to examine assessments year-wise, various evidences available in his possession and identify the functions performed by different entities in each assessment year separately on the basis of such evidences. The next point noted by the Panel was the plea of assessee that it had supplied only about 30% to 35% of total purchases of Mauritius / Dubai based entities and the balance goods were procured by AE's directly from other countries. The assessee had challenged the action of TPO in assessing entire profits of AE's in its hands as incorrect and without prejudice it was submitted that even if the TPO's view was correct, it had to be restricted to profits attributable to supplies made from India. The Panel directed the TPO first to examin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ween non-AE's can be treated as international transactions, if certain situations exist. The TPO further observed that in the instant case, it was proved beyond doubt that foreign AE's do not perform any function/s other than just receiving money and making the payments. It was also held that the assessee only had the capacity to carry out the functions required by online pharmacy. Hence, the entire global profits of assessee and its AE's were allocated according to their functions by treating the Profit Split Method as the most appropriate method. The objection of assessee that transaction not reported in Form 3CEB could not be benchmarked, was not accepted by the TPO. He further pointed out that neither the figures nor facts were imaginary as the figures were obtained from the financials and TP study report submitted by assessee. He acknowledged that the facts were gathered in a very long process search by the Investigation Wing, seizure of material, recording of statements, impounding of material analysis of statements recorded, appraisal report, etc. Rejecting the other objections of assessee, the TPO stated that the profits were allocated on the basis of FAR analysis, which we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action of testing POEM transaction was clearly contrary to the scheme of IT Act and contrary to the Legislative thinking. The assessee also filed elaborate submissions on each of the points to the remand report of TPO and replies given are reproduced in the order of DRP. The assessee also filed details of AE entities, employee cost which is available at page 87 of order of DRP. 25. The DRP first decided the issue of reference made to the TPO by Assessing Officer, wherein objection raised by assessee was that the said reference was made without forming any opinion about satisfaction of conditions specified in section 92C(3) of the Act. Relying on series of decisions, the DRP held that reference made to TPO was as per law. It was further held that Finance Act, 2012 empowers the TPO to determine ALP of international transactions noted by him in the course of proceedings even if the said transactions were not referred to him by the Assessing Officer. Coming to the next plea raised by assessee that the TPO had tested an imaginary transaction of taxable profits of AE's in the hands of assessee on the ground that control and management of AE's exists with the assessee. It was fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at Dubai and also that AE's in Singapore and Mauritius were not playing any role other than payment of godown rent. Based on all these, the TPO concluded that entire control and management of affairs of assessee group is situated wholly in India. Further, based on low employee cost in Dubai, nil employee at Mauritius and high employee cost for Pune based company, the TPO concluded that all the activities of assessee group were carried out in India and therefore the affairs of assessee in Mauritius and Dubai need to be treated together as one since the brain and functions of group are in India and only minuscule work of receiving and sending money was done by AE's at UAE and Singapore. Vide para 5.2.4, the DRP notes that based on this, the TPO has lifted the corporate veil and held the entire group to be operating from India. Accordingly, the TPO applied Profits Split Method as most appropriate method to benchmark the transactions, attributed 3% of global profits to AE's and determined balance 97% of profits as the ALP of transactions undertaken including unreported transactions by Indian companies of group involved. Vide para 5.3, the Panel holds that from the benchmark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that order of TPO was in contradiction to the concept of POEM and provisions of section 6(3) of the Act were held to be misconceived and rejected. It was further held that TPO had not assessed the profits of AE's in the hands of assessee by holding them to be sham entities. On the other hand, the TPO had applied PSM method based on FAR analysis and attributed only 3% of global profits of the group to AE's and balance 97% of global profits were held assessable in the hands of Indian companies involved. Thus, the TPO had not only attributed profits to AE's but also admitted that they were performing certain functions. The Panel concluded by holding that the TPO has not held the AE's to be sham and the argument of assessee in this regard was held to be ill-conceived and rejected. Another finding of Panel in para 5.3.1.2 was From the financials of the assessee and AEs as submitted, we find that both assessee and AEs have incurred significant costs on employees and other administrative costs. Looking at the details of accounts of salary and other indirect expenses, assets, etc. of assessee in INR and AE's in their respective foreign currencies, which were submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e profits of foreign entities belonging to Sava group cannot be brought to tax in the hands of applicant. The DRP thus, vide para 10.3.4 concluded as under:- "10.3.4 Considering all the above, we hereby hold that AE's based on facts on record as discussed by TPO, cannot be held as sham. They are therefore held as genuine legal entities. The issue of attribution of profits in their hands @ 3% of the global profits of Sava group shall be decided in subsequent paragraphs while deciding the benchmarking of international transactions. These grounds are therefore decided accordingly." 28. Then, the next issue which was adjudicated by Panel was the most appropriate method to be applied and held that Profit Split Method was applicable for international transactions including transfer of unique intangibles or any multiple international transactions, which were so inter-related that there cannot be evaluated separately for the purpose of determining arm's length price of any one transaction. It further went on to justify application of PSM method and concluded by holding that ALP should be determined by adopting residuary PSM as most appropriate method and by initially allocatin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deal with Biodeal i.e. takeover of Biodeal Laboratories Pvt. Ltd. This declaration was made by Shri Vinod Jadhav, in his individual capacity and not by assessee company. The Settlement Commission has deleted the aforesaid addition. However, the DRP has made partial addition on account of deal with Biodeal. He then, pointed out that first issue which needs to be addressed is can reference be made to TPO and second issue was whether where the TPO says everything was sham and he lifted the corporate veil, then the question was whether the TPO could go into it. He stressed that if everything was sham, then the TPO has no jurisdiction under section 92CA of the Act. Referring to order of DRP, it was pointed out that DRP in the first instance says that AE's were not sham; but goes on to say that assessee must have given everything to them and / or provided services to AE's. The reasoning for this by the DRP was that Shri Vinod Jadhav was the employee of assessee. It was pointed out that 69% of global profits were added in assessee's hands and 30% of global profits were added in AE's hands. He explained that in any case large part of profits have travelled back to India as div ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. (supra) and stressed that in the facts of case, where no notice was received from the Assessing Officer under section 92C(3) of the Act, proceedings were not correctly initiated. He stressed that in the absence of any opportunity of hearing allowed under section 92C(3) of the Act before making reference to TPO, then proceedings before the TPO are vitiated. He then referred to various observations of TPO, wherein he has come to a finding that AE's are sham and were artificially created and has also referred to show cause given by TPO for lifting corporate veil. He stressed that role of TPO was to decide whether price charged by assessee for provision of services, was correct or not. However, the TPO went beyond his powers and came to a finding that 97% of world's profits were to be taxed in India. He then, referred to the ratio laid down by the Hon'ble High Court of Delhi in Indorama Synthetics (India) Ltd. Vs. ACIT (2016) 386 ITR 665 (Del). He stressed that the Hon'ble High court has laid down that in the absence of any audit report in Form 3CEB and where the assessee does not claim the transactions to be international transactions, then sections 92C(3) and 92C(4) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nario, where whole control and management was in India, where is the need to apply transfer pricing provisions. The Ld. AR stressed that whether wholly and completely the control was in India was the 'status' of assessee, which could be under section 6 of the Act and not by the TPO under the TP provisions. He pointed out that the TPO has time and again referred to the evidences collected by investigation wing and also investigation carried on by them. Then, the Assessing Officer could have acted himself and found out whether control was in India; but by giving mandate to the TPO, the Assessing Officer acted wrongfully and the same is fatal to the whole mechanism of completing assessment in the hands of assessee. 32. The next plea which was raised by the Ld. AR was the opinion of TPO was whether right and just approach. Referring to the orders of Revenue authorities, he pointed out that they had oscillating opinion, wherein in the first instance, they held that the total profits were taxable in the hands of Shri Vinod Jadhav and then they held the same were taxable in the hands of assessee company. Our attention was drawn to chart placed at page 1431 of Paper Book and it was point ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ept case law in the case of Headstrong Services India Pvt. Ltd. (TS-45-ITAT-2016(Del)-TP). He stressed that after amendment to section 92C(3) of the Act, the Assessing Officer had to pass order in conformity with the said provisions. The said case of the Hon'ble Bombay High Court in Vodafone India Services Pvt. Ltd. (supra) was cited before the DRP, but the same was not referred. He then drew our attention to the ratio laid down in Sony India (P.) Ltd. Vs. CBDT & Anr. (2007) 288 ITR 52 (Del), which is a case explaining the situation prior to 2007 and meaning of expression 'having regard' has been explained. He stressed that after the amendment in 2007, law says that the Assessing Officer is bound to accept the TPO's order. So, it is all the more necessary that before making reference to the TPO, the Assessing Officer should issue show cause notice to assessee, so that the assessee can put its case whether any benchmarking of the transactions are required or not. He then, said that DRP concluded by holding that the AEs were not sham, however, Profit Split Method was applied and an upward adjustment was made in the hands of assessee. 33. The Ld. DR first referring to ground of appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence was correctly made by the Assessing Officer. Further, the TPO in FAR analysis finds that control and management of business was in India, so there was no question of so-called reference being made. The next aspect which was raised by her was that Circular which was applicable to the present case was of 2017 as Circular of 2016 was prospective. The Ld. DR referred to the written note and placed reliance on the following decisions regarding recording of satisfaction by the Assessing Officer. i) Price Water House Vs. CIT (2016) 76 taxmann.com 221 (Cal) ii) PMP Auto Components (P.) Ltd. Vs. DCIT (2014) 50 taxmann.com 272 (Mumbai-Trib.) iii) Techbooks International (P.) Ltd. Vs. ACIT (2014) 45 taxmann.com 528 (Delhi-Trib.) iv) Hindalco Industries Ltd. Vs. Addl.CIT (2012) 17 taxmann.com 187 (Bom) v) Carrier Race Technologies (P.) Ltd. Vs. ITO (2015) 64 taxmann.com 252 (Madras) 35. The Ld. DR stressed that only prima facie opinion must be formed, which the Assessing Officer did on the basis of form No.3CEB, wherein the assessee had declared its international transactions. Again our attention was drawn to reference made by the Assessing Officer to TPO, copy of which w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn in section 92CA(1) of the Act, for which he stated that already submissions have been made and reference has been made to the decisions in the case of in Vodafone India Services Pvt. Ltd. (supra) and in Indorama Synthetics (India) Ltd. Vs. ACIT (supra). He pleaded that the said ground needs to be decided and arises in addition to grounds raised challenging exercise of jurisdiction by the Assessing Officer under section 92C(3) of the Act. In this regard, he stated that said issue is raised in line with Rule 11 of Income Tax (Appellate Tribunal) Rules, 1963. 37. The next issue which needs to be addressed which is most important, is, if the control and management is in India and the TPO says that all the entities are controlled and managed in India and hence, 97% of profits are attributed to Indian companies, then whereis its case of international transactions. Referring to arguments of Ld. DR vis-a-vis reported decision of Vodafone India Services Pvt. Ltd. (supra) with special reference to paras 32 and 33 of said decision, the Ld. AR said that if that be the case and if assessee had reported all the transactions of purchase of goods and sale of goods by foreign entities, then as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order. Then, he referred to Instruction No.15/2015, dated 16.10.2015 placed at pages 1435 to 1441 of Paper Book-4, wherein it is provided that the Assessing Officer has to compute total income of assessee under section 92C(4) r.w.s. 92CA(4) of the Act in conformity with arm's length price determined by TPO. Then, our attention was drawn to Instruction No.3/2016, dated 10.03.2016, wherein it is clearly provided that the Assessing Officer has to provide an opportunity of being heard to the taxpayer before recording his satisfaction in three situations mentioned in the said Circular i.e. before making reference to the TPO. In this regard, the Ld. AR referred to decision in Indorama Synthetics (India) Ltd. Vs. ACIT (supra), wherein the Hon'ble Delhi High Court says that the said Circular of 2016 is retrospective. However, it was pointed to the Ld. AR that the Delhi Bench of Tribunal in Louis Vuitton India Retail (P.) Ltd. Vs. DCIT (supra) has held the said Circular to be prospective. In this regard, he stressed that dictate of the Hon'ble Bombay High Court in the case of Vodafone India Services Pvt. Ltd. (supra) is exact opposite. Referring to the letter of Assessing Officer, under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rst determined by DRP and for balance profits, profit split was done between Indian entities and the foreign entities. The DRP had applied five star theory and allocated 69% of residuary profits to the assessee. In this regard, our attention was drawn to the chart. He stressed that if the global profits are attributable to assessee and all foreign AEs are artificial, then foreign AEs become resident of India and jurisdiction to assess such income was with the Assessing Officer (International Taxation) and not with the Assessing Officer, Central Circle. Referring to rule 10B(d) of Income Tax Rules, 1962 i.e. Profit Split Method, it was pointed out that as per clause (2) / (ii), after FAR and on the basis of reliable external market data, how such contribution could be evaluated and added in the hands of assessee. He then, referred to powers of DRP under section 144C of the Act and sub-sections (5), (6), (7) and (8) and referred to enhancement powers of DRP. In this regard, he drew simile to the powers of CIT(A) under section 251(2) of the Act of enhancement, wherein Explanation clearly provides that enhancement can be made with regard to any matter arising out of proceedings i.e. an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in para 47, wherein it is mentioned that powers of DRP were to correct order of Assessing Officer. The Ld. DR further placed reliance on the following decisions:- a) Lahmeyer Holding GMBH Vs. DCIT (2015) 376 ITR 70 (Del) b) Granite Services International P. Ltd. Vs. ACIT in ITA No.532/Del/2016, relating to assessment year 2011-12, order dated 12.09.2017 c) M/s. New Delhi Television Ltd. Vs. ACIT in ITA No.1212/Del/2014, relating to assessment year 2009-10, & Ors. vide order dated 14.07.2017 d) DDIT Vs. Sandvik Information Technology AB in ITA No.128/PUN/2014 and CO No.10/PUN/2015, relating to assessment year 2005-06, order dated 28.12.2016 e) Euroflex Transmissions India Pvt. Ltd. & Anr. Vs. Addl.CIT & Anr. (2016) 48 CCH 190 HydTrib. 43. The Ld. DR pointed out that the case of DRP was that entire control and management of affairs of assessee was wholly situated in India. However, the DRP has overruled the order of TPO and held that AEs were not sham and when these were held to be not sham, then question comes how to benchmark the same. She stressed that where international transaction remained the same, wherein the TPO had attributed less functions to AEs bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alance 3% in the hands of assessee. Now, the DRP in such circumstances, cannot go enlarge findings. The Ld. AR pointed out that by amendment to section 6(3) of the Act, the Statute has intended to bring to tax profits of shell companies, on the basis of control and management theory. He stressed that if under the existing provisions of the Act, such a remedy was already available to the Revenue authorities i.e. by route of TPO, where was the need to introduce amendment to section 6(3) of the Act. He again referred to Circular at page 1588 of Paper Book-4, under which POEM was introduced. He stressed that where the TPO had not applied any TP method, especially when he says management and control in India and hence, profits of entities to be taxed in India, so, where no exercise of application of any method by the TPO, then DRP in such circumstances, cannot assume jurisdiction. 45. The Ld. AR referring to order of DRP pointed out that it starts benchmarking purchase and sale transactions undertaken by assessee and it was the role of DRP to benchmark export of medicine, but it goes on to decide provision of services. He stressed that DRP could not find enabled source of income i.e. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parts of profits to Sava Medica Ltd. We have heard the parties up to ground of appeal No.4 being the jurisdictional issue. 47. We have heard the rival contentions and also gone through written submissions filed by assessee, reply of the Revenue and rejoinder filed by assessee and also various case laws relied upon by both the learned Authorized Representatives and proceed to decide the jurisdictional issue raised in the present appeal. In the facts of present case, assessee company belongs to Sava group. Search under section 132 of the Act on Sava group was conducted on 31.10.2012. Consequent to search proceedings, notice under section 153A, dated 15.05.2013 was issued to the assessee for assessment years 2007-08 to 2013-14. In response thereto, the assessee vide letter dated 21.06.2013 submitted that returns of income originally filed under section 139(5) of the Act may be treated as filed under section 153A of the Act. Thereafter, notice under section 143(2) of the Act was issued to assessee. The Assessing Officer noted that the assessee was involved in international transactions with its foreign entities. Hence, after getting prior approval of CIT(C), Pune vide letter dated 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly as 03.08.2012 to Shri Vinod Jadhav along with questionnaire and thereafter, various Summons were issued to him, consequent to which search proceedings were initiated on 31.10.2012 on Sava group; post-search, certain enquiries were made from different concerns. The sequence of events were as under:- Pre-search Sr.No. Date Events 36 03-08-12 Summons u/s 131(1A) to Mr. Vinod Jadhav promoter of assessee along with detailed questionnaire by DDIT(Inv), Pune 37 21-08-12 * 1st Reply to Summon submitting Brief note on business activity & associated companies Other personal details 38 12-10-12 Summons u/s 131(1A) to Mr. Jadhav promoter of assessee along with detailed questionnaire by DDIT(Inv), Pune 39 17-10-12 2nd Reply to Summon 40 18-10-12 3rd Reply to Summon 41 22-10-12 Statement recorded u/s 131(1)(b) by DDIT(Inv) of Mr. Jadhav 42 23-10-12 * 4th Reply to Summon explaining Boideal Acquisition Transaction Details of Foreign companies 43 25-10-12 5th Reply to Summon explaining business model of SAVA group 44 29-10-12 * 6th Reply to summon Summary of submissions till date Submission of Audited Financials of foreign co Brief ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the above. 02. A search and seizure action in various premises of the SAVA group of cases was conducted by Dy. Director of Income Tax (Inv), Unit 1(2), Pune on 31/10/2012. The above mentioned assessee is a part of that group. 03. Perusal of the appraisal report suggests that the transactions investigated are cross border transactions amongst various Associated Enterprises of this assessee group. Major business of this group is supplying drugs and medicines to the on-line pharmacies and customers of on-line pharmacies in different countries and particularly those in North America. For this purpose, the assessee group had floated a company which goes by various names like Sava Trading FZC, Sava Trading FZE, Goldwings Trading FZE, Westside Trading FZE etc., in Sharjah Airport International Free Zone (SAIF), Sharjah, UAE. 04. Investigation into the affairs of these companies have revealed that the assessee group is selling the medicines and drugs from India to the customers in various parts of the world using the route of Singapore and Mauritius for the purpose of packing the products. The proceeds of sale of such products are received in the bank account of companies regis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perusal of said letter would reflect that the Assessing Officer having taken note of investigation made into affairs of assessee group and suggestion of Addl.DIT(Inv) Unit-I, Pune vide para 10 of his letter to make reference to TPO, was of the view that case needs to be referred to TPO for the analysis of findings of transactions of the group companies with their AEs in UAE, Singapore and Mauritius. The said reference was based on the appraisal report of investigation wing, copy of which was also forwarded to the TPO. Vide paras 3 to 5, the Assessing Officer talks about investigation in the case, modus operandi and justification for reference to the TPO. In para 6, the Assessing Officer refers to the transaction of assessee with its AEs as shown in audit report in form No.3CEB. Undisputedly, the amount of transaction is what was reported in form No.3CEB filed by assessee and copy of the same has been forwarded to the TPO. 53. Further, on 28.09.2014 another reference was made to TPO for determination of arm's length price in the case of Sava group of cases. The contents of said letter are similar. However, in para 6, reference is made to international transactions of assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax in the hands of applicant. 55. The Revenue authorities thus, had on one hand perused the taxability of global profits of Sava group in the hands of Shri Vinod Jadhav and had opposed the settlement petition filed by him on the ground that till he includes the profits of foreign entities in the Settlement Application, the same was not true and complete. The said issue was decided by Settlement Commission vide its order dated 27.08.2015; but simultaneously the Revenue authorities also initiated proceedings in the case of assessee on the ground that the affairs of foreign companies have also to be looked in by the TPO, for which reference was made by the Assessing Officer, Incharge of assessee company vide two separate letters dated 16.12.2013 and 28.09.2014. It may be pointed out that the TPO has vide paras 18 and 18.7.7 stated that the entire business model was brainchild of Shri Vinod Jadhav. Further, in para 18.12 of TPO's order, it has been mentioned that entire operations were managed by assessee company; and also entire development of software and its maintenance and operations were managed and controlled by Shri Vinod Jadhav and employees of Sava Pvt. Ltd. This is the prem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... obal profits to AE parties. Both the TPO and DRP have applied the Profit Split Method to benchmark the international transactions of global profits of assessee and the alleged group concerns. As mentioned earlier, the TPO had held that 97% of entire global profits were to be assessed in the hands of assessee, but the modalities adopted for application of Profit Split Method by DRP is modified, wherein the Panel says in the first step, calculate the global profits, then derive the routine profits of assessee company and exclude the same. Further, derive the routine profits of AE parties and spread them in particular manner. The residuary profits are derived and thus, residuary profits are then allocated to the assessee company with 69% of world profits to the assessee and 31% to AEs in the residuary profits. Consequently, 70% of world profits have been added in the hands of assessee. The Ld. AR has challenged the modality adopted by DRP while applying PSM method i.e. it has failed to consider any external comparables while adopting aforesaid modality in the hands of assessee. We shall deal with that aspect at the relevant time. 57. Before moving further, we may also refer to anoth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the DCIT records reason to believe that income of Anam Trading Pte Ltd. attributable to its PE through Sava Healthcare Ltd. and employees of various group companies in India for assessment year 2011-12 was beyond the prescribed amount and had escaped assessment and notice under section 148 of the Act has been issued. 58. In such scenario and after hearing both the learned Authorized Representatives, we find that following issues need to be adjudicated in the case of assessee, which emanates from the issues raised: Sr. No. Issues i) What is role of Assessing Officer before / while making reference to TPO. Is any hearing to be allowed to assessee under section 92CA(1) / 92C(3) of the Act? ii) Whether while benchmarking a reported transaction (in Form No.3CEB) can the TPO enlarge his scope and look at other connected international transactions, not referred to him? iii) Whether in above scenario, can TPO also decide the issue of control and management of other AEs in the hands of assessee and extent of world profits to be attributed to assessee? iv) Whether jurisdiction of TPO was to determine ALP of international transactions and not compute the income arisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment of income, the Assessing Officer on the basis of material or information or documents in his possession, was of the opinion that either of conditions laid down in clauses (a) to (d) are not specified, then the Assessing Officer may proceed to determine arm's length price in relation to said international transaction in accordance with sub-sections (1) and (2) on the basis of material, information or documents available with him. The proviso thereunder lays down that an opportunity shall be given by the Assessing Officer by serving notice and called upon the assessee to show cause why arm's length price should not be so determined on the basis of material / information / documents in his possession. Under sub-section (4), where arm's length price is so determined by Assessing Officer, then he is to compute total income of assessee having regard to the same. This is the proceeding which has to be carried on by the Assessing Officer while determining arm's length price of international transaction. The said exercise of powers by Assessing Officer to determine arm's length price of international transaction takes place in cases having a certain value of int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on undertaken by assessee. In other words, the Assessing Officer before making reference to TPO has to come to a finding that it is either necessary or expedient to make reference to the TPO for computation of ALP of international transactions undertaken by him. So, the first step in this regard is that the Assessing Officer should come to a finding that some income arises from the international transaction undertaken by assessee, which needs to be benchmarked and its ALP needs to be determined. 66. The question which arises is how the Assessing Officer comes to know that there is an international transaction undertaken by assessee. The first and foremost is the audit report submitted by assessee in Form No.3CEB, which is self declaration made by assessee that it has entered into international transactions with its AE/s. Once such declaration is made, then the Assessing Officer has to come to a finding that the income arising from such an international transaction needs to be computed to find out whether it is at ALP by applying any one of the prescribed methods under section 92C(1) of the Act. This is the preliminary satisfaction of Assessing Officer. 67. The Courts have held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essing Officer to benchmark the same, then in such cases, as per proviso to section 92C(3) of the Act, it is incumbent upon the Assessing Officer to provide an opportunity by serving notice on the assessee to show cause as to why ALP should not be so determined and thereafter, the Assessing Officer has to compute income of assessee having regard to ALP so determined. In the case of Vodafone India Services Pvt. Ltd. (supra), vide para 33 it has been held that when the Assessing Officer himself determines ALP in terms of section 92C(3) of the Act, then it is open to him to consider the issue of income arising and / or being effected or not before commencing proceedings under Chapter X or at the stage of passing of assessment order. In the present case, where the transfer pricing provisions have been carried out by TPO on reference made by Assessing Officer, we hold that provisions of section 92C(3) of the Act and proviso thereunder do not come into play. 71. Now, coming to alternate plea raised by assessee, we find that the said issue has been elaborately considered by the jurisdictional High Court in the case of Vodafone India Services Pvt. Ltd. (supra) and vide para 34, it has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... & Anr. (supra). The relevant findings read as under:- "35. The revenue has relied upon various decisions to contend that no personal hearing is necessary before referring the matter to the TPO. The relevant cases are as under: (a) Sony India (P ) Ltd. vs. CBDT 2007(288) ITR 512; (b) Aztee Software & Technology Services Ltd. vs. ACIT 2007 (294)(AT) 32; and (c) Veer Gems vs. ACIT 2013(351) ITR 35. 36. So far as the decisions at (a) and (b) are concerned they were rendered in the context of Section 92CA(4) as existing prior to 2007. The preamended Section 92CA(4) provided that the Assessing officer will determine the income having regard to the ALP arrived at by the TPO. The earlier (unamended) Section 92CA(4) reads as under: 92CA (4) On receipt of the order under subsection (3), the Assessing Officer shall proceed to compute the total income of the assessee under subsection (4) of section 92C having regard to the arm's length price determined under subsection (3) by the Transfer Pricing Officer. (emphasis supplied) This was similar to the power which the Assessing officer still enjoys when he determines the ALP himself in terms of Section 92C(4) as pointed o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 should be given to consider the assessee's objection but not otherwise." 74. The Hon'ble High Court did not find favour with the submissions of Revenue that reference of international transaction by the Assessing Officer to TPO was a mere administrative act and the Assessing Officer has no discretion in the matter and the Assessing Officer hearing the assessee before making reference to the TPO would be an empty formality and a futile exercise. The Hon'ble High Court held that CBDT Circular regarding distribution of files depending on value of transaction could detract from the obligation of Assessing Officer to follow the principles of natural justice, which we have read into section 92CA(1) of the Act, because once the Assessing Officer refers transaction to TPO, the Assessing Officer will be bound to act in conformity with the order of TPO, as mandated by section 92CA(4) of the Act in all respects including jurisdictional issue as held by this Court in Vodafone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts of the case before the Hon'ble High Court, petitioner had entered into transaction of import of raw materials from Indorama Petrochem Ltd. The return of income was filed at nil after setting off brought forward losses. The case was picked up for scrutiny and during the course of assessment proceedings, voluminous information / details were submitted to the Assessing Officer. The said scrutiny proceedings had to be completed by Assessing Officer by 31.03.2013 but in case reference was made to the TPO, then time limit for completion of assessment was upto October, 2014. In the month of February, 2013, the Assessing Officer required the petitioner to explain as to why transfer pricing provisions should not be made applicable in respect of transaction of import of raw materials amounting to Rs. 196.48 crores from Indorama Petrochem Ltd. The assessee in reply, pointed out that Indorama Petrochem Ltd. was not its AE as defined in section 92A of the Act and also confirmed that both the companies were separate companies and were managed by independent Board of Directors and do not have either direct or indirect control over each other's business. The petitioner states that thereaf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions with its AEs, one of the sources from which the factual information can be gathered was Form No.3CEB filed with the return of income. It was further held that where no such report in Form No.3CEB is filed by assessee what will be the basis for Assessing Officer to record that it is necessary and expedient to refer the question of determination of the ALP of such transaction to the TPO? The Hon'ble High Court in this regard held that 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. It was further noted by the Hon'ble High Court that 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 Hon'ble High Court thus, concluded by holding that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de para 21, the Hon'ble High Court clearly holds that in the facts of present case, where the assessee had not filed accountants report under section 92E of the Act, and yet the Assessing Officer proceeded to determine ALP under section 92C(3) of the Act or refer the matter to TPO to determine ALP under section 92CA(1) of the Act. Referring to para 3.4 of CBDT Circular, it was held that the Assessing Officer must provide an opportunity of being heard to the taxpayer before recording his satisfaction or otherwise. It was further held that the said Instruction No.3/2016, dated 10.03.2016 which replaces earlier Instruction No.15/2015, clarifies the correct legal position and cannot be construed as not applying to the facts on hand. The Hon'ble High Court thus, held that since it was a procedural aspect and was intended to benefit the assessee, it requires to be applied even in the present case, where a reference was earlier made by the Assessing Officer to TPO on 31.03.2013 and thereafter. Since the Assessing Officer had made reference to TPO without affording an opportunity of being heard to the petitioner, the said references were set aside and the Assessing Officer was directed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis of show cause notice issued by him and reply given by assessee and in consonance with Circular of Department dated 10.03.2016. 81. The Mumbai Bench of Tribunal in Videocon Oil Ventures Ltd. Vs. DCIT (supra) while applying the principle laid down in the case of Vodafone India Services Pvt. Ltd. (supra) have held that where no opportunity of hearing has been given by Assessing Officer before making reference to TPO, then it is violation of jurisdictional issue, which could not be cured even with the consent of affected parties. It was further held that the case of violation of principles of natural justice constituted an irregularity and case of violation of jurisdictional issue makes the proceedings void. Support was taken from the judgment of the Hon'ble Supreme Court in Deepak Agro Vs. State of Rajasthan & Ors. (2008) 7 SCC 748. 82. Now, let us come to the objections of Revenue to the pleading made by assessee. First point which is raised is against recording of satisfaction by Assessing Officer as envisaged under section 92C(3) of the Act before referring international transaction to TPO. It is pointed out by the Ld. DR in the written submission that such a opinion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ressed by her that in order to demand a hearing, an objection must be raised before the Assessing Officer during the course of assessment proceedings that international transaction reported in Form No.3CEB do not have element of income in them and as no such objection was raised and since it is not case of assessee that international transactions so reported were not with AEs, then it was not incumbent upon the Assessing Officer to provide an opportunity of hearing or to record detailed satisfaction. She stressed that where the income arose from international transactions reported by assessee in Form No.3CEB filed before the Assessing Officer, it would be enough to apply Chapter X and would certainly constitute prima facie reason, for the Assessing Officer to consider it necessary and expedient to refer the matter to TPO as held by the Hon'ble High Court in the case of Vodafone India Services Pvt. Ltd. (supra) in para 34 of its order (discussed above). It is further argued that once the assessee had itself accepted that there was income arising from international transactions reported by it, the Assessing Officer was under no obligation to record a detailed satisfaction that there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds to be benchmarked first, in the hands of Shri Vinod Jadhav and then in the hands of assessee was a distinct and separate set of transactions. The TPO has also analyzed the said transactions and held that control and management of business carried on by several companies was in India and hence, 97% of world profits were to be taxed in the hands of assessee. In such scenario, there is no merit in arguments of Ld. DR that the Assessing Officer has only made reference in respect of transactions which are already reported in Form No.3CEB. The facts clearly show that what the Assessing Officer has referred is not only the transactions declared in Form No.3CEB but the transactions which as per the Revenue authorities starting from Investigation Team and other Officers needs to be benchmarked in the hands of assessee i.e. on account of sale of medicines by Sava group and other AEs, which are independent entities duly registered in the respective countries as per the laws of said countries. 85. In such facts and circumstances, where the Assessing Officer came to a finding that second transaction needs to be benchmarked by the TPO, then before making reference to TPO, it was incumbent u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2013) 37 taxmann.com 250 (Bom), (Vodafone-2) order dated 06.09.2013. In the said decision, it was held that DRP and ITAT were entitled to set right any defect in the order of TPO as reflected in the draft assessment order including the question of lack of jurisdiction of TPO. Vide para 19, the submissions of Respondent-Revenue were noted and vide para 20, it was held that it was not possible to accept the contention of Revenue that situation in Vodafone India Services Pvt. Ltd. (supra), dated 29.11.2013 (Vodafone 2) case was similar to the present case. In the facts of Vodafone India Services Pvt. Ltd. (supra), dated 29.11.2013 (Vodafone 2), the TPO had suo motu exercised the jurisdiction to determine ALP in respect of two unreported international transactions and it was held that the TPO has jurisdiction to determine ALP of two unreported and un-referred transactions. 87. The Hon'ble High Court in the later decision in the case of Vodafone India Services Pvt. Ltd. (supra) observed that this Court though had relegated the petitioner to alternate remedy but with covenant that existence of alternate remedy by itself would not bar the Court from exercising its extraordinary jurisdi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be reiterated that in Vodafone India Services Pvt. Ltd. (supra) (Vodafone 2), the Court held that Assessing Officer could not deviate from the order of TPO on any issue including the jurisdictional issue that the transaction is or is not an international transaction. Taking note of the fact that in case the draft assessment order was objected to before the DRP, then in that event, in terms of section 144C(13) of the Act, the Assessing Officer was obliged to complete assessment without granting hearing to the assessee in accordance with directions of DRP. In para 37 of the judgment, the Hon'ble High Court concluded by holding that Thus to our mind the hearing has to be given by the Assessing officer before making a reference to the TPO. 89. Now, the Ld. DR has relied on the decision of Hindalco Industries Ltd. Vs. Addl. CIT (supra), but the same has been distinguished by later decision of the Hon'ble Bombay High Court in Vodafone India Services Pvt. Ltd. (supra). 90. The next reliance of the Ld. DR was on the decision of Hon'ble High Court of Calcutta in Price Water House Vs. CIT (2016) 76 taxmann.com 221 (Cal), where the basis of decision was reliance on Sony India (P.) Ltd. Vs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional transactions which come to his notice during the course of proceedings before him. We may here reiterate that the issue of giving show cause notice to the assessee by Assessing Officer before referring to TPO the matter for determination of ALP of international transactions stands covered by the dictate of jurisdictional High Court in the case of Vodafone India Services Pvt. Ltd. (supra). The decision in the case of Vodafone India Services Pvt. Ltd. (supra) is undoubtedly, in a Writ Petition, but vide the said decision, the Hon'ble High Court has laid down the principles to be applied during exercise of jurisdiction by Assessing Officer under section 92CA(1) of the Act. The principles are after taking into cognizance the pre-amended and post-amended provisions of section 92CA(4) of the Act. The Hon'ble High Court has taken note of earlier decisions of the said Court itself in Vodafone India Services Pvt. Ltd. (supra) (Vodafone 2) and of the Hon'ble High Court of Delhi on similar exercise of jurisdiction in Sony India (P.) Ltd. Vs. CBDT & Anr. (supra), which related to pre-amended era of section 92CA(1) of the Act. The Hon'ble High Court also has taken cognizance of submission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The TPO was guided by the background of case i.e. various activities carried on by Shri Vinod Jadhav and the business of group being carried on through many companies in Mauritius, Dubai FTZ, where no direct taxes were levied. Vide para 3.4, it has observed that in fact the management and control of entire global business of group is situated wholly in India and that was the reason, search and seizure action under section 132 of the Act was carried out on the premises of assessee on 31.10.2012. Vide para 3.5 of TPO's order, then considering activities of assessee and various other concerns, the TPO refers to the findings of Investigation Team in relation to functions performed by India based companies for the business carried out in India and shown to be carried in Mauritius / UAE and summarized the same under para 10 under different heads. Based on the said findings of Investigation Team, the summary of functional analysis of business transactions of various multi-locational enterprises belonging to assessee group was summarized which is available at pages 13 and 14 of TPO's order. Then, TPO refers to the transactions reported in Form No.3CEB and in para 14.2, it holds that as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties in this regard, especially where the assessee has not declared any such international transactions in its audit report in Form No.3CEB. In the case of Indorama Synthetics (India) Ltd. Vs. ACIT (supra), no international transaction was reported in Form No.3CEB and where the Assessing Officer was of the view that transactions reflected in the filed return partakes the character of international transaction, the Hon'ble High Court held that the assessee be put to notice of his proposal to make reference to TPO. In this regard, reliance was placed on the decision of Hon'ble Bombay High Court in the case of Vodafone India Services Pvt. Ltd. (supra), which has been referred in paras 19.1 to 19.7. Then, in para 20, the Hon'ble High Court held that this Court concurs with the view expressed by Hon'ble Bombay High Court in the case of Vodafone India Services Pvt. Ltd. (supra) and it further goes on to refer to CBDT circular, which was issued on 10.03.2016 i.e. Instruction No.3/2016. The Hon'ble High Court dismissed the contention of Revenue that the said CBDT Instructions were prospective and held that since it was a procedural aspect and intended to benefit the assessee, hence would a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said plea of assessee, we hold that where the Assessing Officer while making reference of an independent to / and non existing international transactions (as alleged by Ld. AR) had to come to a finding that income arising from the said international transactions needs to be benchmarked, in order to determine its arm's length price and before such reference to the TPO, show cause notice should have been given to the assessee. In the absence of any such show cause notice being given to assessee, the same is irregularity (as held by the Hon'ble Bombay High Court) and the said irregularity cannot be made good by restoring back the same to the file of Assessing Officer as none of the authorities i.e. Assessing Officer or DRP thought it fit to address the issue raised by assessee and disregarded the same in limine. It is the case of violation of principles of natural justice and such an order passed in the hands of assessee cannot stand and the same is invalid and bad in law. 100. The assessee has also raised another issue that the exercise of powers by TPO suffers from infirmity as the alleged transaction which has been benchmarked by the TPO is not an international transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n India during the period. In order to establish whether control and management of affairs situated wholly in India, no powers under the Act have been bestowed on the TPO to decide the same, who operates within the realm of section 92CA of the Act. It is the Assessing Officer who has to come to a finding in this regard. It is settled proposition that powers entrusted on any authority by the Statute cannot be further delegated except as otherwise provided in the Statute. In other words, where under the provisions of the Act it is prescribed that a particular Officer is to exercise a power, then it has to be so exercised by him and no other person, unless the Statute so prescribes. In the present set of facts, the said exercise has not been carried out by the Assessing Officer, but if we go through the order of TPO, then such a finding has been given by TPO in various paras of TPO's order. The Assessing Officer was aware of whole background, which is clear from reference made by him to TPO and in such circumstances, he should have exercised his jurisdiction. He has failed to do so and on this ground also, the non exercise of jurisdiction by Assessing Officer makes the assessment orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of assets held by assessee and its AE's in Dubai and Mauritius in tabulated charts and compares non-current assets held by AE's with base of non-current assets of assessee in India and holds that the AE's do not have any asset base in Dubai and Mauritius to carry out activities of AE's located in these countries and all the activities were carried out by assessee in India. It is therefore, conclusively proved that entire control and management of affairs of assessee group was wholly situated in India. In para 21, he looks at role of DHL i.e. entity in Singapore and again comes to the same finding that the entire control and management of assessee group was wholly situated in India. Vide para 22, he acknowledged that the assessee have been stating that there is no proof that control and management of affairs of assessee were wholly in India. He concludes that But, in view of the detailed discussion made above, it is held that the entire control and management of the affairs of the assessee group is wholly situated in India. Then, he talks of lifting of corporate veil and vide para 25.1 that he has no doubt in his mind that day to day activities of the AE's in M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er and after its perusal, reference was made by Assessing Officer to TPO, then it cannot be said that Assessing Officer was not aware of transactions in question. It was his duty first, to come to a finding whether such transactions undertaken by assessee and other concerns were inter-linked and first, he should have determined whether the conditions of section 6(3) of the Act were fulfilled or not and then make reference, if needed. Hence, there is no merit in the whole exercise carried out by TPO and also in non exercise of jurisdiction by Assessing Officer, which affects the jurisdiction of Assessing Officer to make assessment. Even the DRP did not address this issue. In the present case, since the Assessing Officer has failed to apply the law correctly, we find no merit in the consequent orders passed against assessee and the same do not stand and are held to be bad in law. Thus, first issue raised by assessee is allowed. 108. Though, we have already quashed the proceedings in the case, but we may also address the second issue of powers of DRP and TPO raised vide grounds of appeal No.2.1 to 2.5. We have already in the paras hereinabove decided the issue of powers of TPO, whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. The powers of CIT(A) are stipulated in section 251 of the Act and he has to function within those limitations while deciding any appeal; he cannot exceed his powers in making an addition on account of new source of income. 16. The Hon'ble Supreme Court of India in the case of Commissioner of Income Tax Vs. Shapoorji Pallonji Mistry (1962) 44 ITR 891 (SC) has held that AAC is not competent to enhance assessment in appeal by discovering new source of income not mentioned in return or considered by the Assessing Officer in assessment. The Hon'ble Apex Court in the aforesaid case held as under:- "8...............The only question is whether in enhancing the assessment for any year he can travel outside the record, that is to say, the return made by the assessee and the assessment order passed by the Income tax Officer with a view to finding out new sources of income, not disclosed in either. It is contended by the Commissioner of Income tax that the word " assessment " here means the ultimate amount which an assessee must pay, regard being had to the charging section and his total income. In this view, it is said that the words " enhance the assessment " are not confined to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me which have been the subject matter of consideration by the Income tax Officer from the point of view of taxability. In this context " consideration " does not mean " incidental " or " collateral " examination of any matter by the Income tax Officer in the process of assessment. There must be something in the assessment order to show that the Income tax Officer applied his mind to the particular subject matter or the particular source of income with a view to its taxability or to its non taxability and not to any incidental connection". 18. The law laid down by the Hon'ble Apex Court has been reiterated by the full Bench of the Hon'ble Delhi High Court in the case of Commissioner of Income Tax Vs. Sardari Lal & Co. (2001) 251 ITR 864 (Del)(SB). The Hon'ble Delhi High Court held:- "Looking from the aforesaid angles, the inevitable conclusion is that whenever the question of taxability of income from a new source of income is concerned, which had not been considered by the Assessing Officer, the jurisdiction to deal with the same in appropriate cases may be dealt with under section 147/148 of the Act and section 263 of the Act, if requisite conditions are fulfilled. It is inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ea already entered in the regular books of account and therefore no addition is called for. Accordingly, we hold that the order of the Ld.CIT(A) enhancing the income by Rs. 25 lakhs is not proper. 14.1 Even otherwise also we are of the considered opinion that the Ld.CIT(A) was not justified in enhancing the income of the assessee by Rs. 25 lakhs. The Hon'ble Supreme Court in the case of CIT Vs. Shapoorji Pallonji Mistry (Supra) has held that it would not be open to the AAC to introduce into assessment new sources, as his power of enhancement is restricted only to income which was subject matter of consideration for purposes of assessment. The Hon'ble Supreme Court in the case of Rai Bahadur Hardutroy Motilal Chamaria (Supra) has held that the power of enhancement of AAC is restricted to subject matter of assessment or sources of income which have been considered expressly or by clear implication by ITO from point of view of taxability of assessee. Therefore, AAC had no jurisdiction to assessee a source of income which had not been processed by ITO and which was not disclosed either in return filed by the assessee or in assessment order. We find that following the above decisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and determined in the course of assessment. However, there is a solitary but significant limitation to the power of revision, viz., that it is not open to the Commissioner to introduce in the assessment a new source of income and the assessment has to be confined to those items of income which were the subject matter of original assessment. 13. Applying the above well-settled principles of law to the facts of the instant case, we are of the view that the Tribunal was justified in holding that in calling for a remand report on the aforenoted four points, the Commissioner had exceeded his jurisdiction. While computing the total business income of the assessee, the Assessing Officer had estimated the sales at an enhanced figure and had applied a higher rate of gross profit. Thus, the only matter dealt with by the Assessing Officer in the assessment order was the estimation of profits and gain of the business of the assessee. None of the aforenoted four points had any bearing on the question of estimation of either the sales or the gross profit rate. From the observations, extracted above', it is evident that the Commissioner had his doubts about the capacity of the assessee to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made the addition on that account. The CIT(A) in the present case has travelled beyond the sources of income which was the subject matter of consideration by the Assessing Officer, wherein the Assessing Officer after accepting the contract receipts had doubted the expenses claimed by the assessee and accordingly, applied the net profit rate to determine the income in the hands of assessee. The CIT(A) had first started enquiries in respect of payments made by the assessee which was the issue considered by the Assessing Officer while completing assessment under section 143(3) of the Act. Later, the CIT(A) has issued the show cause notice, wherein reference was made to receipts, which were accepted by the Assessing Officer and not disturbed. In the absence of any enquiry by the Assessing Officer regarding receipts recorded in the Dummy HO Cash Book, the same was outside the purview of enhancement scope of the CIT(A). In case any new source of income is to be added in the hands of assessee which was not considered by the Assessing Officer, the jurisdiction to deal with the same in appropriate cases, is to be dealt with under section 147/148 of the Act and / or under section 263 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... But where the TPO has not exercised his jurisdiction, the DRP in exercise of his powers cannot benchmark new transaction though reported by assessee, in the hands of assessee. Further, the DRP benchmarks the second transaction in the hands of assessee and overturns the order of TPO and holds that AE's are not sham, but are legal entities and attributes part of global profits, first to the assessee and then another part to AE's and the residuary profits are divided amongst the assessee and AE's. In the result, 70% of world profits are added in the hands of assessee under guise of Profit Split Method. The rules in this regard are completely overlooked and no comparables are selected and on its own, allocation of profits is made by the DRP. The said exercise carried out by DRP is beyond its scope and is new line of adjustment, which is outside its jurisdiction. The DRP has also failed to consider the aspect that no such transaction was reported in Form No.3CEB by the assessee and has failed to address the issue raised by assessee. In this regard, we find no merit in the exercise of jurisdiction by the DRP. The Ld. DR has placed reliance on several case laws in this regard, explai ..... X X X X Extracts X X X X X X X X Extracts X X X X
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