2017 (11) TMI 1137 - AT - Income Tax

No hearing provided before referring the matter to the TPO under provisions of section 92CA(1)- violation of principles of natural justice - Held that - Not providing an opportunity to the assessee before referring the matter to TPO is a jurisdictional issue and thus the violation of same leads to an order which is not sustainable in law and the same is invalid /void. Hence, the orders passed by AO are bad in law and therefore stands quashed. In this view of the matter, the additional grounds raised by the assessee are allowed.

Issues Involved:
1. Re-characterization of Share Application Money as 'Loan'
2. Upward Transfer Pricing Adjustment
3. Determination of Arm's Length Interest Rate
4. Jurisdictional Validity of AO's Reference to TPO
5. Assessment of Interest Income and Expense
6. Charging of Interest u/s 234D

Detailed Analysis:

Re-characterization of Share Application Money as 'Loan':
The authorities below erred in re-characterizing share application money pending allotment as 'loan' and making an upward transfer pricing adjustment of ?7,80,74,292 towards interest chargeable on Share Application Money Pending Allotment with Associated Enterprises (AEs). The reasons assigned for this re-characterization are wrong and contrary to the facts and circumstances of the case, provisions of the Income Tax Act, 1961, and Rules made thereunder. The assessee contended that the transaction being capital in nature, no additions could be made.

Upward Transfer Pricing Adjustment:
The authorities below made an upward transfer pricing adjustment without appreciating that the transaction being capital in nature, no additions could be made. The authorities also failed to appreciate that there is no section in the Act which empowers to re-characterize debt to equity or vice versa. Such provisions existed under Chapter X-A: General Anti-Avoidance Rule (GAAR) but were not applicable for this year.

Determination of Arm's Length Interest Rate:
The authorities below determined the Arm's Length interest rate on the share application money pending allotment with its AEs at 3.53% p.a. without appreciating that share application money given to foreign Associate Enterprises in Foreign Currencies should be based on LIBOR rate i.e., 0.905%. The Transfer Pricing Officer added an average spread of 262.50 basis points to the LIBOR rate to arrive at the ALP interest rate of 3.53% without issuing any show cause notice to the appellant and without giving an opportunity of being heard.

Jurisdictional Validity of AO's Reference to TPO:
The AO made a reference to the TPO without recording separate satisfaction and without giving an opportunity of being heard to the assessee. The Tribunal noted that the requirement for taking a decision after taking on board the objection becomes necessary, especially when the assessee had objected to consider the transaction as International Transaction. The Tribunal found that the AO did not consider the objection of no income arising or potentially arising from the transaction before making the reference to the TPO, which is a jurisdictional issue. The Tribunal held that not providing an opportunity to the assessee before referring the matter to TPO is a jurisdictional issue, and the violation of the same leads to an order which is not sustainable in law and is invalid/void.

Assessment of Interest Income and Expense:
The authorities below erred in assessing interest income of ?3,77,57,677 and interest expense of ?5,08,11,328 under the head 'Income from Other Sources' instead of assessing it under the head business income. The reasons assigned by them for doing so are wrong and contrary to the facts and circumstances of the case, provisions of the Income Tax Act, 1961, and Rules made thereunder.

Charging of Interest u/s 234D:
The learned Assessing Officer erred in charging interest of ?90,524 u/s 234D, which is wrong and contrary to the provisions of the Income Tax Act, 1961, and Rules made thereunder.

Conclusion:
The Tribunal quashed the orders passed by AO as they were found to be bad in law due to the jurisdictional issue of not providing an opportunity to the assessee before making a reference to the TPO. Consequently, the other grounds of appeal raised by the assessee against the merits of the demand were not adjudicated. The appeal was allowed in favor of the assessee.

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