TMI Blog2019 (7) TMI 173X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer to show cause the assessee, whether it was necessary and expedient to refer the matter to TPO, which the Assessing Officer has failed to do so. Though the Assessing Officer records reasons and even gets those reasons approved by CIT and clearly mentions the reasons for reference in the referral letter but fails to show cause the same to assessee. The said act of Assessing Officer is in contradiction to the provisions of section 92CA(1). The copy of said reference letter was never given to the assessee either during the course of assessment proceedings / TP proceedings or DRP proceedings. The assessee has time and again objected to the exercise of powers by TPO alleging that no international transaction arises on the premise of benchmarking transaction of control and management of AE parties from India and that too, through assessee s hands, but the said objection has not been dealt with by TPO or DRP and an order under section 92CA(3) of the Act passed by TPO, which has been partially modified by DRP. After such an order has been passed, the Assessing Officer, as per amended provisions of section 92CA(4) is bound to act in conformity with the said adjustment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rescribes. 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 order bad in law. Taxability on the basis of status of residence of an entity - 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 cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quash the findings of DRP and consequent order passed under section 143(3). Both the jurisdictional issues are thus, decided in favour of assessee and assessment order passed in the case is held to be invalid and bad in law. - ITA Nos.1062 to 1068/PUN/2017 - - - Dated:- 27-6-2019 - MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM For The Assessee : Shri Kishore Phadke For The Revenue : Ms Nandita Kanchan ORDER PER SUSHMA CHOWLA, JM: This bunch of appeals filed by assessee are against respective orders of ACIT, Central Circle 2(1), Pune, all dated 28.02.2017 relating to assessment years 2007-08 to 2013-14 passed under section 143(3) r.w.s. 144C(13) r.w.s. 153A of the Income-tax Act, 1961 (in short the Act ). 2. This bunch of appeals relating to same assessee on similar issues were heard together and are being disposed of by this consolidated order for the sake of convenience. However, in order to adjudicate the issues, we refer to the facts in ITA No.1062/PUN/2017, relating to assessment year 2007-08. 3. The assessee in ITA No.1062 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no authority to such effect existed with the learned TPO. The learned DRP erred in not deleting the entire addition proposed by the learned TPO on the above analogy as such and further erred in not proceeding with the matter instead of leaving the matter at that point, considering the scope of powers u/s 144C(8) of ITA, 1961. Requirements u/s 92C(3) 3.1 The learned AO and learned DRP erred in law and on facts in not appreciating that no any opinion, as so envisaged in section 92C(3), as regards profit passing, etc. was reached by the then AO, before making a reference to the TPO for benchmarking of the international transactions of the appellant. 3.2 The learned DRP erred in law and on facts in putting the onus of substantiating absence of opinion, as so envisaged in section 92C(3) of ITA, 1961, on the appellant. The learned DRP ought to have appreciated that appellant can't substantiate a negative and on the contrary, onus lies on the revenue to substantiate the adherence to the procedure enshrined in section 92C(3) of the ITA, 1961. Benchmarking of imaginary transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6.1 The learned DRP erred in law and on facts in rejecting the TNMM approach and applying the PSM approach for benchmarking of international transaction for supply of goods to AE parties without any cogent reasons and in an arbitrary manner thereby making adjustment amounting to ₹ 29,78,900/-. 6.2 The learned DRP erred in law and on facts in not appreciating the appellant's submissions as regards MRP rules and regulations prevailing in India, and not appreciating further efforts of the appellant in establishing that the prices for goods charged to the AE parties, are comparable to the prices for very same products charged by Arm's Length Parties. The learned DRP erred in not giving any specific finding on the alternate submissions on CUP approach in this regard. 6.3 Assuming the PSM is appropriate method for benchmarking the learned DRP erred in law and on facts making hypothetical segregation between routine profits residual profits under PSM approach. Quantification of routine profits 7.1 The learned DRP erred in law and on facts in selecting PLI for deciding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law and on facts in drawing incorrect conclusions and making wrong conjectures from the quantum of software expenditure, electricity expenditure, manpower cost, etc. incurred by the appellant vis-a-vis the AE parties. 8.6 The learned I-T authorities erred in law and on facts in not accepting the detailed PSM working based on the OECD guidelines, though the same was submitted by the Appellant during the course of hearing. Prima facie mistakes 9.1 The learned DRP erred in law and facts in incorrectly appropriating 60% of the business development function to the appellant, instead of 40% revealing from the findings thereto. The learned DRP erred in making allocation contrary to their own finding in Para-13.7.22. 9.2 The learned DRP erred in law and facts in not granting telescoping of higher routine profits while determining residual profits attributable to appellant in Para-13.7.18.3 read with Para-13.7.17.2. 9.3 The learned DRP erred in law and facts in making addition of value of international transactions amounting to ₹ 77,367,713/- to the return of income while determini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ugs in the year 2002-03. Later on, he started exporting of pharmaceutical drugs (trading) to foreign countries. The TPO also notes that the assessee started business of medical transcription, prescription verification services and contractual work for online pharmacies. In the financial year 2003-04, he started Anagha Inter-trade Services Pvt. Ltd. (now Anagha Pharma Ltd.) (now Sava Healthcare Ltd.). The assessee was engaged in the business of exporting third party medicines to different countries worldwide. Till April, 2010, the assessee group was engaged in export trading of third party pharmaceutical products / drugs to foreign countries. In April, 2010, the assessee group diversified its activity by acquiring pharmaceutical division of M/s. Biodeal Laboratories Pvt. Ltd., Surendranagar, Gujarat. The assessee group also acquired manufacturing facility of Dhanvantari Botanicals Pvt. Ltd., Malur, Karnataka through its group company M/s. Sava Pvt. Ltd. The said concern was engaged in manufacturing of herbal preparations and herbal medicines. 7. The TPO noted that the business of group had increased manifold, so the profits also increased and to escape from the tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of order has tabulated the domestic and foreign companies which were engaged in the exporting third party medicines and pharma products and allied activities. The TPO noted that profiles of different concerns as part of group and first of all commented on the profiles of domestic companies and observed as under:- i) Anagha Pharma Pvt. Ltd. (assessee). This was a flagship concern of assessee group, which was engaged in business of trading and export of third party medicines to foreign countries. Based on the orders received in retail and wholesale segment, it procured material of the products from local distributors in Pune and exported it to the customers all over the world. It was commented upon by the TPO that the assessee had procured material on its own, shipped the material to warehouses in Singapore and Mauritius and booked the sales as in the name of UAE based companies. ii) SAVA Medica Ltd. This was a new company incorporated in financial year 2010-11 and was a holding company for M/s. Biodeal Laboratories Pvt. Ltd., of whose pharma division was taken over by assessee group. The said concern SAVA Medica Ltd. was engaged in manufacturi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ternational transactions with its AE s i.e. sale of finished goods (Finished Drugs Formulations) amounting to ₹ 7,73,67,713/-. During the course of TP proceedings, the assessee explained that goods were actually exported to two entities i.e. Anam Trading Co., Mauritius and Sava Trading Ltd., both the concerns were engaged in sale of finished goods (finished drugs formulations). 9. The TPO noted from Form 3CEB and the transfer pricing study report of assessee that the assessee had benchmarked international transactions by applying TNMM method as most appropriate method and PLI of assessee was shown at 16.72%, as against average PLI of the comparables at 2.77%. It was thus, concluded by the assessee that international transactions were at arm's length price. The TPO then analyzed the working of PLI of assessee which is reproduced at page 7 of order. In order to understand the methodology and purpose of undertaking activities through intermediary companies in UAE or Mauritius, the TPO asked the assessee to furnish certain information. The TPO on analysis of business pattern of assessee observed as under:- i) In India, there are some regul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ames of employees of contractor i.e. DHL Global. 11. The TPO vide para 10 refers to the finding of investigation team in relation to functions performed by India based company for the business carried out in India and shown to be carried out in Mauritius / UAE. The same is summarized as under:- A) Development of business: i) This business artificially shown in UAE based companies has been developed by Shri Vinod Jadhav by using the assets and resources of India based companies. ii) The UAE based companies do not possess any resources or assets in order to develop the business of this scale having the worldwide customers. iii) Quality of service and delivery and the products is ensured using the human resources, assets and intangibles developed and based in India. GTF (Global Trading FZC) is artificially shown to be the legal owner of some of such assets like JadePharma but in fact all these functions are done in India without any intervention or instructions from GTF. B) Receipt of orders from the customers: i) It is proved that the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 shipping on JadePharma which in turn is connected to www.savaordersystem.biz E) Tracking of the shipments: i) Once the order is shipped to the customers, automatic mail is sent by JadePharma to the customers conveying the details of the shipments along with the fog-in details of such customers. The customer logs in on www. savaordersystem.biz and could view the status of their orders which are shipped by SAVA. ii) In case of any problems in shipping of the shipments, the customers mailed such problems to orders@savaglobal.com which were sorted out by the SAVA group persons In pune. F) Pricing of the products: i) In JadePharm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 made from India. ii) Payments for various expenses through RTGS or other instruments as per the dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 show cause notice for the individual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 shipment of consig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ries 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 exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Receipt of orders customers from No No No Yes Yes Customer care No No No Yes Yes Merchandising procurement and No No No Yes Yes Packing No Yes No Yes Yes Shipping No Yes No Yes Yes Tracking of the shipments No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D (B*C%) E (B*3%) F (B-D-E) G (D+F) 2007-08 2,28,44,905 2.77 6,32,804 6,85,347 2,15,26,754 2,21,59,558 2008-09 17,69,90,270 0.31 5,48,670 53,09,708 17,11,31,892 17,16,80,562 2009-10 32,69,96,892 2.42 79,13,325 98,09,907 30,92,73,660 31,71,86,985 2010-11 8,81,15,771 4.35 38,33,036 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15,47,38,428 0 15,47,38,428 2009-10 31,71,86,985 4,55,81,486 27,16,05,499 0 27,16,05,499 2010-11 8,54,72,298 73,95,355 7,80,76,943 0 7,80,76,943 2011-12 47,12,60,845 1,66,56,860 45,46,03,985 94,92,109 44,51,11,876 2012-13 12,92,72,186 5,99,91,658 6,92,80,528 54,08,126 6,38,72,402 2013-14 32,81,21,587 4,78,94, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had to be restricted to profits attributable to supplies made from India. The Panel directed the TPO first to examine the genuineness of claim of assessee that only 30% to 35% of total purchases of AE s were from Indian entities. It further directed if the claim of assessee was found to be correct, then the TPO was to examine functions of assessee in respect of procurement by AE from countries other than India on the basis of evidence available with him. The TPO was directed to submit a report in this regard. 22. The TPO submitted the report vide letter dated 20.12.2016 before the DRP. He first rejected additional evidence as being inadmissible since sufficient opportunity was given to the assessee to submit all the evidences during the course of TP proceedings in support of its claim. The TPO was of the view that the assessee was neither denied any opportunity nor it was prevented by sufficient cause to submit the said evidences during TP proceedings. Hence, he was of the view that additional evidence submitted by assessee need not be admitted. However, without prejudice to the same, the TPO filed a report on the directions given by DRP. Then the TPO in the repor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aisal report, etc. Rejecting the other objections of assessee, the TPO stated that the profits were allocated on the basis of FAR analysis, which were supported by the facts and figures. The AE's were allocated only 3% of profit according to its functions; all though AE's were proved to be sham entities. He acknowledged that Nonetheless, the AO has specifically been requested to bring even these 3% of the income of the AE's for taxation in India. Another objection of assessee was that the TPO had exceeded his powers in testing un-referred transactions. In this regard, reliance was placed on the ratio laid down in CIT Vs. Cushman Weikfield India Pvt. Ltd. reported in 367 ITR 730 (Del) and Honda Motorcycle and Scooter Ind. Pvt. Ltd. Vs. DCIT reported in 46 CCH 459 (Del). In this connection, the TPO drew attention of the Panel to the newly inserted provisions of section 92CA(2B) of the Act w.e.f. 01.06.2012, which empowered the TPO to benchmark even those transactions, which were not referred to him. Various other issues were raised by assessee objecting to the transfer pricing and also the report of TPO, which we shall refer at the relevant time. 24. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad 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 further submitted by the assessee that taxing profits of AE's was not a transaction mentioned in section 92B of the Act and also process of testing the control and management of AE's was not the same as benchmarking of international transactions, in fact it was not a transaction at all and hence, could not be benchmarked. The assessee also argued that section 6(3) of the Act provides that an entity is resident of India if its place of effective management is situated wholly in India. The Panel also noted the arguments of assessee that the Legislative intent behind amendment of section 6(3) of the Act and introducing the concept of POEM gets defeated. The assessee had alleged that TPO in the garb of TP proceedings had invoked provisions of section 6(3) of the Act, which was also incorrect and unsustainable in law. It was further submitted by assessee that the Assessing Officer had referred to the TPO only various international transactions as contained in Form 3CEB for benchmarking. However, the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermined 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 benchmarking applying PSM done by TPO, we find that TPO has not benchmarked any transaction of control and management of the entire assessee group including the AE's lying with the assessee. Based on the evidence and submissions made, he has just held that the control and management of the entire group including the AE's is situated wholly in India and therefore it is a fit case to apply PSM to benchmark the transactions as no other method is found appropriate by TPO. The Panel thus, held that TPO has not determined the ALP of international transaction of control and management of AE's in India as argued. The TPO had benchmarked only the transactions reported and other inter-related and inseparable transactions found based on the evidence in his possession but not reported. Therefore, it was held that TPO had not tested any imaginary transaction or the transaction of control and management of AE's in India with the assessee. 27. The next plea of assessee of applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 by assessee in tabulated form, which are reproduced under para 10.2.8 at pages 186 and 187 of order of DRP; the Panel noted the argument of assessee that AE's were incurring substantial expenses on salaries and other indirect expenses and the said expenses as proportionate to sales, in case of AE's were substantially higher. Further, the AE's were holding substantial assets. The AE's had also entered into several agreements for supply of products as per orders. Therefore, the AE's could not be declared as merely paper entities or sham as done by TPO. Further, the assessee pointed out that AE's had chosen the business model of outsourcing their operations; accordingly, AE's have appointed DHL at Singapore for dispatching the orders and Sava Infotech Ltd. in India for processing the orders, etc. Hence, merely because AE's have outsourced its functions, it could not be held as sham since they require less manpower for functioning. Vide para 10. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmining 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 allocating a basic return or routine profits, appropriate for the routine international transactions in which each AE was engaged and then allocating residuary profits based on the relative value of each enterprise s contribution. Necessary directions were given in this regard. The Assessing Officer in final assessment order passed under section 143(3) r.w.s. 144C(13) of the Act r.w.s. 153A of the Act noted the directions of DRP, which reduced the transfer pricing adjustment to ₹ 29,78,900/- as against ₹ 91,21,109/- proposed in the draft order. Further, as per directions of DRP, gross value of international transaction as in Form 3CEB of ₹ 7,73,67,713/- were added to the total income of assessee for the year under consideration. Further disallowance was made under section 14A of the Act at ₹ 16,387/-. 29. The assessee is in appeal against the order of Assessing Officer/TPO/DRP. 30. The Ld. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 dividend and salary to Shri Vinod Jadhav and same were offered to taxes @ 15%. He pointed out that the question was attribution of profits to Sava Healthcare Ltd and Sava Medica Ltd., but the DRP did not allow an application made under section 154 of the Act. Our attention was drawn to the issue raised vide ground of appeal No.3.1, wherein earlier satisfaction dated 23.05.2014 and 18.07.2014 of Revenue was that entire global profits were that of Shri Vinod Jadhav. However, the finding of Settlement Commission vide order dated 27.08.2015 was that it was not to be taxed in the hands of Shri Vinod Jadhav. He then pointed out that second satisfaction by Revenue dated 16.12.2015, where the entities were shell companies and were formed for tax evasion. The Ld. AR stressed that where matter has to be referred to TPO for benchmarking international transactions, there are some operative words in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Act come into play and the Assessing Officer is duty bound to give opportunity. Reference was also made to CBDT clarification of 2016. Thereafter, reliance was placed on the decision of Hon ble High Court of Calcutta in PCM Strescon Overseas Ventures Ltd. Vs. DCIT (2017) 85 taxmann.com 165 (Cal) and Mumbai Bench of Tribunal in Videocon Oil Ventures Ltd. Vs. DCIT in ITA No.6630/Mum/2016, relating to assessment year 2012-13, order dated 20.09.2017. The Ld. AR explained that the assessee was making purchase of goods from India and the same were exported to Mauritius in the first year and to UAE thereafter. Our attention was drawn to news report of January, 2016, wherein it was reported that in India, there cannot be any sale of drugs online. In December, 2018, the Hon ble High Court of Madras had banned online sale of drugs in India. Referring to the order of TPO especially in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... horities, 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 pointed out that search action was carried out on Sava group on 31.10.2012, notice under section 153A of the Act was issued to the assessee company on 15.05.2013. However, on 23.05.2014 satisfaction of Assessing Officer was that Shri Vinod Jadhav was the main person behind all foreign entities and unless the profits of foreign entities are included in settlement application, the same cannot be true and complete. On 18.07.2014 also, similar satisfaction of Assessing Officer that profits of foreign entities are to be included in settlement application of Shri Vinod Jadhav was part of report passed in the case of Shri Vinod Jadhav before the Settlement Commission. On 28.09.2014, case was referred to TPO after approval of the Commissioner. On 27.08.2015 in the settlement proceedings, the findings of Settlement Commission are that profits of foreign entities could not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 appeal No.3.1 raised, pointed out that provisions of section 92C(3) of the Act are attracted when the Assessing Officer is making TP analysis. However, provisions of section 92CA(3) of the Act are to be applied when TPO is making TP analysis; so section itself is not applicable to the facts of the case. Referring to the arguments of Ld. AR that no satisfaction was recorded by the Assessing Officer and if satisfaction is recorded, then not correctly recorded, she referred to Audit Report in form No.3CEB for all the years and pointed out that reference was made on the basis of reporting made by the assessee. Our attention was drawn to reference by Assessing Officer to the TPO dated 16.12.2013 for assessment years 2008-09 to 2011-12, wherein the Assessing Officer has recorded satisfaction. She also filed copy of Reference Note of Assessing Officer, u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 was handed over during the course of hearing and it was stressed that the Assessing Officer gives background of investigation by search team and also with regard to appraisal report, the Assessing Officer asked the TPO to give his finding on the arm's length price of international transactions. The Ld. DR pointed out that it was misleading to say that the TPO had benchmarked the control and management of affairs of business and findings of TPO in this regard were referred at pages 73 to 76 of TPO order. The Ld. DR placed reliance on the decisions in DIT (IT) Vs. Morgan Stanley Co. Inc. (2007) 292 ITR 416 (SC), Pepsico India Holdings Pvt. Ltd. Anr. Vs. Addl.CIT Anr. (2019) 197 TTJ 393 (Del) and Google India Pvt. Ltd. O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 per section 92CA(1) of the Act, no show cause has been issued to the assessee. It was stressed by him that the assessee had not so reported. Referring to reference letter of Assessing Officer, it was pointed out that where the Assessing Officer talks of investigation in the hands of assessee and confronts the TPO in this regard, but fails to confront the results of investigation to the assessee, then such a reference suffers from infirmity. 38. Another aspect raised by the Ld. AR was that while benchmarking international transactions, the TPO can operate in a restricted field and cannot go to decide control and management of business of AEs while benchmarking int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision 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 which reference was made to the TPO, he says that in the said letter itself reference goes beyond the reported transactions and in fact artificial transactions were referred to the TPO. He stressed that the TPO cannot decide this issue and at best it could be referred for international taxation. 39. The next point which was raised by the Ld. AR was that sale of pharma medicine was not free trade from India and it was allowable only for selected medicine and also against transcriptions. However, both in Dubai and UAE, sale of pharma medicine was a free trade and that was the reason the sale was being made by AEs in Dubai and UAE and not in India. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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. any matter relating to assessment. In this regard, the Ld. AR stressed that powers of DRP were lesser than that of CIT(A), wherein the CIT(A) can look into any matter but the DRP to look into enhancement or variation of adjustment but not any new issue. For this, he placed reliance on the decision in Munjal Showa Ltd. Vs. DCIT (2016) 382 ITR 555 (Del). The Ld. AR here stressed that powers of enhancement of CIT(A) were wider than powers of DRP; if the CIT(A) cannot do something, then the DRP cannot venture into something new, which the Assessing Officer has not even gone into. Referring to the order of TPO, he pointed out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 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 but the DRP had attributed more functions to AEs, then it is not case of enhancement. She also pointed out that the DRP has concluded and held that Profit Split Method was the most appropriate method. She admitted that yes , no comparables were picked up to benchmark the transactions. 44. The Ld. AR in rejoinder pointed out that the case of TPO was that global profits relate to the assessee and the same is disputed. The case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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. added services of provision of services to export trading of medicine. It was case of Ld. AR that DRP can look into what the Assessing Officer or TPO had done. In this regard, he drew an example that in case Assessing Officer/TPO had looked into A, B and C aspects and whether in part or not, any of the aspects the DRP had power to look into them; but not anything under them i.e. provision of added services. Ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecide 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 17.09.2014, case was referred to TPO vide his letter dated 28.09.2014. The said reference was made under section 92CA(1) of the Act for the purpose of determination of arm's length price of international transactions. Thereafter, another notice under section 142(1) of the Act, dated 28.07.2015 was issued due to change in incumbent along with detailed questionnaire and other no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 1 st 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 2 nd Reply to Summon 40 18-10-12 3 rd Reply to Summon 41 22-10-12 Statement recorded u/s 131(1)(b) by DDIT(Inv) of Mr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of BTPL - Yousuf Saifee owner of BTPL d) Loose bundles impounded 52 28-03-13 Survey action at Balasai Net Pvt. Ltd. by DDIT(Inv) Loose papers Email communications (Annexure B of TP order) Email communications (Annexure E of TP order) 53 28-03-13 Survey action at Tata Communication Pvt. Ltd. 54 03-04-13 19-04-13 Statement of employee of Sava Private Ltd. (Group Concern) a) Vikram Taware along with emails b) Ravindra Dasarwar c) Sample Email communications (Annexure D of TP order) 55 22-04-13 Statement Recorded u/s 131 by DDIT(Inv), Pune of Mr. Vinod Jadhav Invoices raised by AE on Third party (Annexure C of TP Order) 50. It may also be pointed out herein itself that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made by UAE based companies and income is shown to be earned by UAE based companies. This is done in order to not to pay taxes on the huge profits earned in this business which are received in UAE. Such huge profits are repatriated by the Promoter of the group Shri Vinod Jadhav in the guise of salaries, commissions etc., and he has claimed the same as exempt by claiming himself to be a non-resident India (NRI) for F.Y. 2009-10. 05. The modus operandi of the group adopted for this purpose is unearthed through various evidences and statements of various persons. This is detailed in Chapter-6 of the Appraisal Report from page 66 to 127. The Addl. DIT(Inv), Unit-1, Pune in his letter enclosed with the Appraisal Report, has suggested in para 10 that cases of this group may be referred to the Transfer Pricing Officer. Analysis of the findings of the transaction of this group companies with their Associated Enterprises in UAE, Singapore and Mauritius also make it imperative that these cases should be referred to the Transfer Pricing Officer. The detailed justification for the same also forms the part of the Appraisal Report, a copy of the Appraisal Report is enclosed f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 company reported in audit report in form No.3CEB for assessment years 2012-13 and 2013-14 and assessment year 2007-08 and for Sava Medica Ltd. for assessment years 2012-13 and 2013-14. The said reference was made consequent to approval of CIT(C), Pune letter dated 17.09.2014. In all the investigations, the issue was taxability of global profits of Sava group. 54. Simultaneously, proceedings were also carried out in the hands of Shri Vinod Jadhav on the ground that he was the main person behind all foreign entities. Shri Vinod Jadhav has moved settlement application before the Settlement Commission, which was opposed by authorities below on the ground th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 premise on which the TP proceedings were initiated, carried out and finalized in the case of assessee. The TPO in the final analysis has held that control and management of business is with the assessee company in Pune and hence, 97% of profits are to be taxed in its hands and he has also directed the Assessing Officer to tax balance 3% in the hands of assessee. The TPO has passed order under section 92CA(3) of the Act proposing an upward adjustment of ₹ 91,21,101/- in assessment year 2007-08 and in entirety, he has proposed the additions as under over the period of 153A proceedings:- A.Y. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 52/- 2,07,007/- 27,71,39,029/- 56. The order of TPO is dated 29.01.2016 i.e. after the findings of Settlement Commission vide order dated 27.08.2015. The TPO has held that entire business model is brainchild of Shri Vinod Jadhav, despite the findings of Settlement Commission that profits of foreign entities could not be taxed in the hands of Shri Vinod Jadhav. The TPO further goes on to hold that entire operations are managed by assessee company after holding that the business model is of brainchild of an individual Shri Vinod Jadhav. It may be mentioned herein itself that the DRP has not upheld the findings of TPO in this regard. The AE entities which were held to be sham / shell companies by the TPO has been reversed by DRP in para 10.3.4 vide order dated 31.12.2016, wherein it has been held that AE entities cannot be held as sham and they were genuine, legal entities. The DRP in line with this, attributes certain part of global 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 all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbined years at ₹ 49.81 crores. The DCIT takes notes of observations of DRP with regard to AEs having no infrastructure and then holding that sales of Singapore entity were in effect the sale of Dubai entity only and services for all these sales were from India. Therefore, for benchmarking purpose, the transactions of Singapore entity were considered as transactions of Dubai entities. The DCIT in para 4 notes that the assessee which was the foreign company was carrying on its activities through Sava Healthcare Ltd. and the employees of group companies who were resident in India were using assets, intangibles and employees of Sava Healthcare Ltd.; thus, it constitutes PE of assessee in India. Therefore, the profit attributable to PE is taxable income of foreign company in the hands of PE through Sava Healthcare Ltd. and its various employees. Referring to income as per Profit and Loss Account and assets held, both fixed and current, by AEs in Singapore, Dubai and Mauritius by different concerns in assessment years 2007-08 to 2013-14, the DCIT records reason to believe that income of Anam Trading Pte Ltd. attributable to its PE through Sava Healthcare Ltd. and employees of vari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowance for any expenses or interest arising from an international transaction shall also be determined having regard to arm's length price, so, section talks of income arising from an international transaction and its computation having regard to arm's length price of said transaction. 60. Under section 92A of the Act, associate enterprise is defined and there is no issue raised on this aspect in the present case and hence, we need not go into the details of various conditions laid down therein. 61. Section 92B of the Act defines international transaction to be a transaction between two or more associated enterprises, either or both of whom are non-resident. So, it is incumbent that one of the parties has to be non-resident for invoking provisions of section 92B of the Act. Then, it talks of various transactions which would be covered as international transactions. 62. Section 92BA of the Act talks of specified domestic transactions with which we are not concerned at present. 63. Coming to section 92C of the Act which provides steps to be taken for computation of arm's length price in relation to an international ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er exercises the power to determine ALP of international transactions in the given circumstances. The Revenue has time and again announced value of international transactions, wherein if the value of international transactions is less than threshold limits, then such power is exercised by Assessing Officer and in case it is above the threshold limit then power vests with the TPO to determine ALP of international transactions undertaken by assessee. 64. Such a provision is provided under section 92CA(1) of the Act. The said sub-section reads as under:- 92CA. Reference to Transfer Pricing Officer. - (1) Where any person, being the assessee, has entered into an international transaction in any previous year, and the Assessing Officer considers it necessary or expedient so to do, he may, with the previous approval of the Commissioner, refer the computation of the arm s length price in relation to the said international transaction under section 92C to the Transfer Pricing Officer. 65. In other words, where the assessee had entered into an international transaction, in any previous year and if the Assessing Officer considers it ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee and carry out the procedure and apply the provisions of the Act in order to determine ALP of international transactions. The Ld. DR in this regard has strongly relied on the ratio laid down by the Hon ble Delhi High Court in Sony India (P.) Ltd. Vs. CBDT Anr. (supra). 69. The first argument of assessee before us by way of grounds of appeal No.3.1 and 3.2 is that where the Assessing Officer has not fulfilled the conditions laid down in section 92C(3) of the Act i.e. it has not given any opportunity calling upon the assessee to show cause as to why ALP of transfer of profit passing should not be determined, then order passed by the TPO under section 92CA(3) of the Act cannot stand. The next plea raised by assessee by way of oral submission before us in relying on the ratio laid down by jurisdictional High Court in the case of Vodafone India Services Pvt. Ltd. (supra) is that such an opportunity of hearing to the assessee before making reference to TPO to benchmark ALP of international transactions, is also to be read into section 92CA(1) of the Act. 70. First, we will take up the plea of assessee with regard to non satisfaction of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ected or potentially arises and / or effected by international transaction would certainly be a factor to determine whether or not it is necessary or expedient to refer the matter to the TPO. The Hon ble High Court further held that in case no objection is raised by assessee to the applicability of Chapter X, then the prima facie view of Assessing Officer would be sufficient to make reference to TPO. However, wherein objection is raised about the applicability of Chapter X by the assessee, then the requirement for taking a decision after taking on board the objection becomes necessary. The Hon ble High Court further held that if this issue is considered at the very threshold by the Assessing Officer, it could save an elaborate exercise of determining the ALP, which may turn out to be entirely academic. The Hon ble High Court thus, held that it is for the above reason that grant of personal hearing before referring the matter to TPO has to be read into section 92CA(1) in cases where the very jurisdiction to tax under Chapter X is challenged by the assessee. 72. The Ld. DR has placed reliance on the ratio laid down in Sony India (P.) Ltd. Vs. CBDT Anr. (supra) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in conformity with the arm's length price as so determined by the Transfer Pricing Officer. (emphasis supplied) Therefore in the context of the preamendment law as then existing hearing on jurisdictional issues could take place after the order of the TPO which is not possible post amendment of 2007. In any case, the fact situation existing in this case of viz. a question of jurisdiction was not in issue in the above cases and therefore these two cases can have no application to the present case. 73. The Hon ble High Court in the case of Vodafone India Services Pvt. Ltd. (supra) concluded by holding as under:- 40. In our view, once the AO gives hearing to the assessee before making a reference to TPO, the TPO would be bound by formation of opinion of AO that there was international transaction in the relevant year and that income arises or is affected by the international transaction and the TPO is bound to determine the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd place in the impugned draft assessment order. The failure on the part of Assessing Officer in not having examined the issue of income arising or not from an international transaction was an illegality. The Hon ble High Court quoted from Mr. Nani Palkhiwala who in the concluding paragraph of his Preface to the eighth edition of his monumental work had observed as under:- The Law and Practice of Income Tax observed: Every Government has a right to levy taxes. But no Government has the right, in the process of extracting tax, to cause misery and harassment to the taxpayer and the gnawing feeling that he is made the victim of palpable injustice 75. The Hon ble High Court took note of the fact that where both the Assessing Officer and TPO did not deal with preliminary objection raised by assessee, then it was natural for the assessee to feel harassed. The TPO does not deal with petitioner s objection about applicability of Chapter X on the ground that it would be dealt in by the Assessing Officer. Thereafter, when the petitioner raises the same issue before the Assessing Officer, he does not deal with the same on the groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that the above reference was illegal since in the year under question, it had not entered into any international transaction with its AEs and no reference of such transactions could have been made by Assessing Officer to TPO under section 92CA of the Act. The Hon ble High Court decides the issue after referring to relevant provisions of Chapter X with special reference to section 92CA of the Act and vide paras 14 and 15 has held as under:- 14. Section 92CA reveals that there are certain jurisdictional perquisites for the making of a reference by the AO to the TPO. In the first place, the AO has to be satisfied that the Assessee has entered into an international transaction or a specified domestic transaction. Where, as in the present case, the Assessee raises a threshold objection that it has not entered into any international transaction within the meaning of Section 92B of the Act, it is imperative for the AO to deal with such an objection. If the AO decides to nevertheless make a reference, he has to record the reasons, even prima facie, why he considers it necessary and expedient to make such a reference to the TPO. 15. What is referred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r:- 17. While Section 92CA(1) does not itself talk about a hearing having to be given to the Assessee upon the latter raising an objection as to the jurisdiction of the AO to make a reference, such requirement appears to be implicit in the very nature of the procedure that is expected to be followed by the AO. As already noticed, the AO has to record that he considers it necessary and expedient to make a reference. The AO has to deal with the objections raised by the Assessee. It is only thereafter that the AO can come to the conclusion, even prime facie, that it is necessary and expedient to make the reference. This has to be done prior to making a reference. 78. The Hon ble High Court in Indorama Synthetics (India) Ltd. Vs. ACIT (supra), judgment dated 25.07.2016 then referred to the ratio laid down in the case of Vodafone India Services Pvt. Ltd. (supra) and held that it concurred with the said issue. It further observed that it appears that CBDT had specifically accepted the legal position as explained by the Hon ble High Court in the case of Vodafone India Services Pvt. Ltd. (supra) and has not gone by the decision of Hon ble Gujarat Hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Cal), judgment dated 11.08.2017 has decided similar jurisdictional issue as to whether the Assessing Officer should afford reasonable opportunity of hearing to the assessee concerned and thereafter, pass a speaking order. The assessee had two branch units at two countries apart from India and there was no business transaction between unit in India and second branch unit, therefore TP provisions in respect of so-called international transaction were not attracted. Show cause notice was issued to assessee by Assessing Officer that there was international transaction within meaning of section 92B of the Act between branch units and the unit in India. The assessee did file an objection to the same but no opportunity of hearing was afforded to petitioner. The Assessing Officer did not decide the jurisdictional fact as to whether the transaction requires the attention of TPO. The TPO started proceedings of transfer pricing and the assessee did participate. The proceedings before the DRP were restrained by the Court referring to Circular dated 10.03.2016, which admittedly, came into force subsequent to the decision of Assessing Officer to refer the matter to TPO. It was held that transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . DR in this regard. In the next para, the Ld. DR refers to the contentions raised by Ld. AR on without prejudice to the above that the Assessing Officer did not record satisfaction regarding profit shifting before referring the matter to TPO and in support, Counsel of assessee had relied on the decision in the case of Vodafone India Services Pvt. Ltd. (supra) along with other decisions. The case of Revenue here is that the Hon ble High Court has laid down the ratio that before referring matter to the TPO, the Assessing Officer must give an opportunity of hearing to assessee, in case if an objection challenging jurisdiction is raised by assessee before the Assessing Officer. It is pointed out that, whereas in the present case, the issue raised is whether Assessing Officer is required to record satisfaction that too, a detailed one, demonstrating that there is shifting of profits, before referring the matter to TPO. It is argued by the Ld. DR in this regard that the said issue cannot be said to be covered by the ratio laid down in the case of Vodafone India Services Pvt. Ltd. (supra). Referring to provisions of section 92(1) of the Act and for the purpose of applying Chapter X, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of Assessing Officer dated 16.12.2013, under which reference was made to TPO. The said reference has been made pursuant to approval of CIT(C), Pune. The contents of said letter which have been reproduced by us in the paras hereinabove revealed two things. As per para 6, reference was made to transactions reported in audit report in Form No.3CEB. The Ld. DR has filed copies of Form No.3CEB filed by assessee year-wise. The perusal of said Form No.3CEB would reflect the transaction of sale of finished goods i.e. finished drugs formulation and method applied by assessee, TNMM method. 84. Now, coming to paras 3 to 5 of reference letter issued by Assessing Officer, wherein it is pointed out that transactions envisaged by Investigation Team were cross border transactions amongst various AEs of assessee group. The major business of group was supplying medicine to online pharmacies and customers of online pharmacies in different countries and particularly those in North America. It was explained that the assessee group was selling medicines and drugs from India to customers in various parts of world using the route of Singapore and Mauritius for the purpose of packing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the Assessing Officer has failed to do so. Though the Assessing Officer records reasons and even gets those reasons approved by CIT and clearly mentions the reasons for reference in the referral letter but fails to show cause the same to assessee. The said act of Assessing Officer is in contradiction to the provisions of section 92CA(1) of the Act. The copy of said reference letter was never given to the assessee either during the course of assessment proceedings / TP proceedings or DRP proceedings. The assessee has time and again objected to the exercise of powers by TPO alleging that no international transaction arises on the premise of benchmarking transaction of control and management of AE parties from India and that too, through assessee s hands, but the said objection has not been dealt with by TPO or DRP and an order under section 92CA(3) of the Act passed by TPO, which has been partially modified by DRP. After such an order has been passed, the Assessing Officer, as per amended provisions of section 92CA(4) of the Act is bound to act in conformity with the said adjustment made. This is the mandate of section 92CA(4) of the Act. Hence, the jurisdictional issue raised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supra) (Vodafone 2), on facts it was found that petitioner had not challenged / objected to the jurisdiction of TPO at any time prior to filing the petition and on the contrary, it had participated in the proceedings before TPO without raising any objections. The Hon ble High Court then takes note of factual aspects of the case before them and notes that the petitioner had from the very outset objected to the jurisdiction of authorities to apply Chapter X on issue of shares at a premium by it to its holding company, which was evident from Form No.3CEB, where the accountant has specifically stated that the said transaction was not covered by Chapter X, as this issue of shares does not give rise or effect income. Further, even during TP proceedings while replying to the show cause notice, the assessee had in its reply protested to jurisdiction of TPO to apply Chapter X. Further, the Hon ble High Court also referred to decision in Hindalco Industries Ltd. Vs. Addl.CIT (2012) 211 Taxman 315 (Bom) of the said Court itself to refuse to entertain Writ Petition on that ground that the petitioner had willingly participated in the proceedings before the TPO and hence, the Court refused to en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ACIT Anr. (supra) and no cognizance of amended provisions of section 92CA(4) of the Act had been taken. We have already referred to later Division Bench decision of Hon ble High Court of Calcutta in PCM Strescon Overseas Ventures Ltd. Vs. DCIT (supra), where judgment is dated 11.08.2017 and hence, the ratio in Price Water House Vs. CIT (supra) does not apply. 91. Further, in PMP Auto Components (P.) Ltd. Vs. DCIT (supra), reliance placed upon by the Ld. DR, where the assessee had reported international transactions, the Tribunal held that there was no scope of allowing any opportunity to show cause. We agree with the said proposition but as pointed out in the paras hereinabove, the reported transaction in the hands of assessee in Form No.3CEB was the export trading of medicines and not world profits of various entities, of which the control and management was in India, as per finding of TPO. 92. The next reliance placed upon by the Ld. DR was on Techbooks International (P.) Ltd. Vs. ACIT (2014) 45 taxmann.com 528 (Delhi-Trib.), which vide its order dated 28.04.2014 had applied the decision of the Hon ble Delhi High Court in Sony India (P.) Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmissions of Solicitor General that action of Assessing Officer in referring international transactions to TPO was mere administrative act, because as per CBDT Instruction No.3/2003, dated 20.05.2003, the Assessing Officer was to exercise powers under section 92C of the Act where the value of transaction was upto ₹ 5 crores (now revised to ₹ 15 crores) and the Assessing Officer is required to refer the transactions to TPO, where even the value of international transactions exceeds ₹ 5 crores (now exceeds to ₹ 15 crores). It was further argued that in view of above Circular, the Assessing Officer has no discretion in the matter and therefore, the Assessing Officer hearing the assessee before making reference to TPO would be an empty formality and futile exercise. The Hon ble High Court vide para 44 noted this and vide para 45 holds as under:- 45. We are unable to accept the above submission of the revenue. CBDT Circular regarding distribution of files depending on value of transaction cannot detract from the obligation of AO to follow the principles of natural justice, which we have read into Section 92(A)(1), because once AO refers the tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransactions reported in Form No.3CEB and in para 14.2, it holds that as the management and control of affairs of assessee group, found to have been situated wholly in India, correct profitability of transactions entered into by assessee could not be ascertained by using TNMM method. Vide para 14.3, it was observed that it is therefore concluded that TNMM method is not most appropriate method for benchmarking such complex transactions, which have been designed to escape legitimate taxation in India, which have been made with the sole intent of tax evasion. In such scenario, the TPO vide para 15.1 was of the view that there was no better method than Profit Split Method to benchmark the transactions undertaken by the assessee and its AEs and profits earned by then, not only the transactions are complex, but its correct profitability in India cannot be ascertained by using TNMM method as the most appropriate method. He further holds that It is therefore conclusively proved that the entire control and management of the affairs of the assessee group is wholly situated in India. Then, he applies FAR analysis and lifts corporate veil and vide para 25.1, he holds that he has no doubt in his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ective and held that since it was a procedural aspect and intended to benefit the assessee, hence would apply where the reference was made by the Assessing Officer to TPO on 31.03.2013 and thereafter. The decision was thus, given relying on the decision of Hon ble Bombay High Court in the case of Vodafone India Services Pvt. Ltd. (supra) and re-affirmed by CBDT Instruction No.3/2016. This was the dictate of Hon ble High Court, undoubtedly, though in a Writ Petition. 98. Now, coming to the reliance of Ld. DR on ratio laid down by Delhi Bench of Tribunal in Louis Vuitton India Retail (P.) Ltd. Vs. DCIT (supra), wherein a contrary view has been taken and reliance was placed on the decision of Hon ble High Court of Punjab Haryana in Shri Vishnu Eatables (India) Ltd. Vs. DCIT (2016) 389 ITR 385 (P H), wherein it was held that failure to supply satisfaction notice to assessee before making reference of international transaction to TPO was at the highest mere irregularity, which does not make reference made void ab-initio. It may also be pointed out that the decision in Hon ble High Court of Punjab Haryana was in a Writ Petition. The said proposition of Hon ble High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the exercise of powers by TPO suffers from infirmity as the alleged transaction which has been benchmarked by the TPO is not an international transaction but it is a transaction of status of assessee, which in any case, had to be exercised by Assessing Officer and not by TPO. The next aspect of the issue is whether the TPO had power to come to a finding that entire control and management of affairs of assessee group is wholly situated in India. Such a finding is recorded by the TPO at various places starting from show cause notice to final conclusion against assessee. The plea of Ld. AR is that the issue of deciding the control and management of affairs of assessee is a status of residence to be decided in the hands of assessee and such decision of status of residence is not in the realm of determining ALP of international transactions. This is the exercise to be carried out under section 6(3) of the Act, which is the domain of Assessing Officer to interpret and decide and it is beyond domain of TPO to venture into such a finding. 101. Section 6(3) of the Act at the relevant time read as under:- 6. For the purposes of this Act, - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 order bad in law. 104. Now, coming to next aspect of provisions of section 6(3) of the Act, which have been amended by Finance Act, 2015 w.e.f. 01.04.2016. The said amendment changes the taxability on the basis of status of residence of an entity and cannot be said not to bring in new tax burden and hence, the same cannot be applied retrospectively. As per amended provisions, a company which is an Indian company or whose place of effective management in that year is India is said to be resident in India, in any previous year. In other words, for being subjected to charge of income tax in India, the definition of resident company has undergone change and such change is to be applied prospectively. We find no merit in the stand of Ld. DR that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dged 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 Mauritius and Dubai were operated from India and he concludes by holding that affairs of parent company and AE's in Mauritius and Dubai, therefore, needs to be treated as wholly. After that, vide para 26 onwards, he applies Profit Split Method. 106. Looking at the exercise carried out by the TPO from page to page, para to para, it is clear that he has come to a finding on the basis of different aspects that entire control and management of affairs of assessee group was wholly situated in India. Once he had to come to such a finding, then he holds that Profit Split Method was to be applied. So, we find no merit in the stand of Revenue and also written submissions filed by Ld. DR and the report of Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ince 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, which is raised by way of ground of appeal No.2.5. Now, we restrict our decision to the powers of DRP, which can be exercised while benchmarking ALP. 109. In order to understand this issue, we need to make reference to sub-sections (5) to (8) of section 144C of the Act. In order to adjudicate the issue raised in the present appeal, what we need to see is the specific provisions of section 144C(8) of the Act. It is provided thereunder that the Panel may confirm, reduce or enhance the variation proposed in draft order and it has no power to set aside any proposed variation or issue any direction under sub-section (5) for further enquiry and passing of assessment ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase 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 the assessment reached through a particular process but the amount which ought to have been computed if the true total income had been found. There is no doubt that this view is also possible. On the other hand, it must not be overlooked that there are other provisions like sections 34 and 33B, which enable escaped income from new sources to be brought to tax after following a special procedure. The assessee contends that the powers of the Appellate Assistant Commissioner extend to matters considered by the Income tax Officer, and if a new source is to be considered, then t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntal 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 inconceivable that in the presence of such specific provisions, a similar power is available to the first appellate authority . 19. The Pune Bench of Tribunal in M/s. Jaihind Engineers Vs. ITO in ITA No.791/PN/2016 relating to assessment year 2008-09 and in Shri Lalita G. Kale (Prop.) Vs. ITO in ITA No.792/PN/2016, relating to assessment year 2009-10, vide order dated 15.07.2016 held as under:- 13. The Tribunal in M/s. Vijay Builders Vs. The Income Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee by ₹ 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 the Hon ble Delhi High Court in the case of Sardarilal and Company (Supra) has held that whenever question of taxability of income from a new source of income is concerned which has not been considered by the AO, jurisdiction to deal with same in appropriate cases may be dealt with u/s.147/148 and section 263 if requi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome 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 raise finances for the purchase of goods and show a huge turnover in the very first year of his business. In other words, the enquiry ordered by the Commissioner was to satisfy himself about the source of investment by the assessee. It is axiomatic that failure to pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 the Act, where requisite conditions are fulfilled. Such is the proposition laid down by the Hon ble High Court of Delhi in CIT Vs. Sardari Lal Co. (supra). Applying the said proposi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, explaining the powers of DRP, but those are distinguishable on facts. Accordingly, we quash the findings of DRP and consequent order passed under section 143 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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