2017 (12) TMI 670 - HC - Income Tax

Assumption of jurisdiction by the TPO and subsequently the ultimate reference to the dispute resolution panel - denial of principles of natural justice - not to to afford a reasonable opportunity of hearing to the assessee concerned - Held that - In the facts of the present case, although the circular dated March 10, 2016 was not in vogue at the material point of time, the applicability of the principles of natural justice and the requirement of the assessing officer deciding on a jurisdictional fact cannot be denied. The section as it stands requires the assessing officer to take a decision on a jurisdictional fact. That by itself implies that, the assessing officer while taking a decision on such jurisdictional fact, ought to afford a reasonable opportunity of hearing to the assessee concerned and thereafter pass a speaking order. AO not having afforded any opportunity of hearing to the first petitioner on the jurisdictional issue raised, it ought not to have transferred the matter to the TPO. The assessing officer has acted in breach of the principles of natural justice in doing so. The assumption of jurisdiction by the TPO and subsequently the ultimate reference to the dispute resolution panel are therefore at fault, in the facts of the present case. Thus setting aside the writing dated April 16, 2015 of the TPO and the dispute resolution panel subsequent thereto. The assumption of jurisdiction by the TPO is set aside. The assessing officer is requested to proceed on the basis of the show cause issued by him dated March 11, 2015 and the reply given thereto by the assessing concerned contained in the writing dated March 24, 2015, in accordance with law, and in consonance with the circular of the department dated March 10, 2016.

Issues:
1. Jurisdictional error in transferring assessment to Transfer Pricing Officer (TPO) without deciding jurisdictional fact.
2. Breach of principles of natural justice by assessing officer.
3. Applicability of circular dated March 10, 2016 regarding right to hearing for assessee.
4. Compliance with Section 92CA of the Income Tax Act, 1961.

Jurisdictional Error in Transfer to TPO:
The petitioners challenged a notice by the TPO and subsequent steps taken by the department, arguing that there was no international business transaction between the Indian unit and branch units in other countries. The assessing officer did not decide on this jurisdictional fact before transferring the matter to the TPO, breaching natural justice principles. The High Court held that the TPO's assumption of jurisdiction was faulty due to the assessing officer's error. The court set aside the TPO's notice and instructed the assessing officer to proceed based on the initial show cause notice and reply, in line with the circular of March 10, 2016.

Breach of Natural Justice:
The assessing officer failed to provide a reasonable opportunity of hearing to the petitioners before transferring the assessment to the TPO, violating principles of natural justice. The court emphasized that the assessing officer must afford the assessee a hearing on jurisdictional issues and pass a speaking order. As a result, the TPO's assumption of jurisdiction and subsequent reference to the dispute resolution panel were deemed faulty in this case.

Applicability of Circular and Right to Hearing:
Although the circular of March 10, 2016 was not in effect when the assessing officer referred the matter to the TPO, the court highlighted the importance of natural justice principles and the assessing officer's obligation to decide on jurisdictional facts. The circular mandates providing an opportunity of hearing to the assessee before recording satisfaction on income arising from arm's length pricing of transactions. The court stressed that the assessing officer's failure to grant a hearing to the petitioner on jurisdictional issues led to the erroneous transfer to the TPO.

Compliance with Section 92CA:
The assessing officer invoked Section 92CA of the Income Tax Act, 1961, which allows referral to the TPO for determining arm's length pricing in international transactions. The court noted that the assessing officer must satisfy himself on the jurisdictional fact and afford the assessee a hearing before transferring the assessment. In this case, the court directed the assessing officer to proceed based on the initial show cause notice and reply, following the circular of March 10, 2016, to ensure compliance with the law.

In conclusion, the High Court set aside the TPO's notice and directed the assessing officer to proceed in accordance with the law, emphasizing the importance of natural justice and proper decision-making on jurisdictional facts before transferring assessments to the TPO.

← Previous Next →