2021 (3) TMI 837 - HC - Income Tax

TP Adjustment - selection of MAM - CUP method or TNMM - DRP held that an independent arm s length transaction, entered into by the Petitioner s parent company with an independent entity in Algeria was the acceptable comparable - Applying this acceptable comparable, the commission payable fell in the acceptable range of 0.5% to 1%, and was found proper and legal and did not require any adjustment - HELD THAT - There are reasons given by the DRP for upholding the action of the TPO and we cannot analyse the same, while exercising writ jurisdiction. The aforesaid reasoning would have to be tested before the appropriate forum. The factual background would have to be necessarily evaluated by the AO while framing the assessment order. Therefore, in the instant case, we cannot say that directions are non-speaking and there is a breach of principles of natural justice. The objections and the material placed by the Petitioner have been examined, but for the reasons noted above, the DRP has taken a different view. Even if we were to assume for the sake arguments that this view is erroneous, we cannot hold it be an error of jurisdiction. Every error of an authority is not open to judicial review merely by terming it to be a jurisdictional error , although the same may, at a later stage, be set aside for being erroneous We will have to venture into the factual matrix of the case and come to a conclusion on whether the findings of the DRP are proper, and comment on the methodology behind the determination of the ALP. There cannot be any denying the fact that each assessment year is an independent proceeding and therefore the factual finding given by the DRP while agreeing with the TPO with regard to the method to be applied for determining the ALP will have to be examined by the appropriate forum. On the aspect of the Petitioner not being afforded an opportunity of hearing, we may only observe that it is not the case of the Petitioner that a hearing was not held. In fact, the Petitioners have averred that on 1st December, 2020, the final hearing in the matter was conducted by Respondent No. 2. The Petitioner had also filed its written submissions before Respondent No. 2 on the subject matter, raising the plea of consistency. Besides, detailed submissions on merit, along with the relevant materials have also been filed in support thereof. Thus, we cannot attribute any violation of breach of natural justice to the DRP on the ground of not affording an opportunity of hearing.

Issues Involved:
1. Challenge to the directions dated 2nd February 2020 by Respondent No. 2.
2. Alleged arbitrariness and breach of principles of natural justice.
3. Ultra vires provisions of the Income Tax Act, 1961.
4. Breach of Articles 14, 19(1)(g), and 265 of the Constitution of India.
5. Failure of the Dispute Resolution Panel (DRP) to consider objections appropriately.
6. Application of the rule of consistency relating to the Transfer Pricing methodology.
7. Availability of statutory remedies and maintainability of the writ petition under Article 226.

Detailed Analysis:

1. Challenge to Directions by Respondent No. 2:
The petitioner, a private limited company, challenged the directions dated 2nd February 2020 issued by Respondent No. 2. The petitioner argued that these directions were arbitrary, against the principles of natural justice, ultra vires the provisions of the Income Tax Act, 1961, and in breach of Articles 14, 19(1)(g), and 265 of the Constitution of India.

2. Alleged Arbitrariness and Breach of Principles of Natural Justice:
The petitioner contended that the Transfer Pricing Officer (TPO), acting as a quasi-judicial authority, was obligated to adhere to the principles of natural justice. The petitioner argued that the DRP failed to appropriately consider and deal with its objections, resulting in a breach of natural justice.

3. Ultra Vires Provisions of the Income Tax Act, 1961:
The petitioner argued that the impugned directions were ultra vires the provisions of the Income Tax Act, 1961. Specifically, the TPO's rejection of the transfer pricing methodology adopted by the petitioner and the subsequent draft assessment order were challenged.

4. Breach of Articles 14, 19(1)(g), and 265 of the Constitution of India:
The petitioner claimed that the impugned directions violated Articles 14 (equality before the law), 19(1)(g) (right to practice any profession or to carry on any occupation, trade, or business), and 265 (taxation only by authority of law) of the Constitution of India.

5. Failure of the DRP to Consider Objections Appropriately:
The petitioner argued that the DRP failed to consider its objections appropriately. Despite filing detailed written submissions and furnishing evidence, the DRP rejected the objections without proper application of mind.

6. Application of the Rule of Consistency Relating to Transfer Pricing Methodology:
The petitioner emphasized the rule of consistency, arguing that the DRP should have followed its own directions issued for the previous assessment year (A.Y. 2015-16). The petitioner contended that the DRP had previously accepted the Comparable Uncontrolled Price (CUP) method as the appropriate basis for determining the Arm's Length Price (ALP) and should have done the same for A.Y. 2016-17.

7. Availability of Statutory Remedies and Maintainability of the Writ Petition:
The court noted that the petitioner had statutory remedies available under the Income Tax Act, including the option to file an appeal before the Income Tax Appellate Tribunal against the assessment order. The court emphasized that a writ petition under Article 226 is ordinarily not maintainable when effective alternate remedies are available.

Court's Observations:
The court acknowledged that the directions issued by the DRP are binding on the Assessing Officer and that the petitioner has an effective alternate remedy. The court reiterated the principle that writ petitions are generally not entertained when statutory remedies are available, except in exceptional circumstances.

The court examined whether the present case fell within the exceptions to the rule of alternative remedy. The court found that the DRP had considered the petitioner's objections, including the rule of consistency, but had taken a different view based on the facts of the case. The court concluded that the DRP's directions were not non-speaking and that there was no breach of natural justice.

The court emphasized that it could not scrutinize the DRP's directions as an appellate court and that the appropriate forum for evaluating the factual background and methodology was the Assessing Officer and the appellate authorities.

Conclusion:
The court dismissed the writ petition, finding no merit in the petitioner's arguments. The court clarified that the petitioner could raise all pleas relating to the merits of the case before the appropriate forum when the directions under Section 144C(5) of the Income Tax Act ripen into an order or are given effect to by the Assessing Officer.

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