2021 (8) TMI 930 - HC - Income Tax

Denial of principles of natural justice - Penalty u/s 271AA - opportunity of hearing not being given - Whether it was incumbent on the A.O. to have given the writ applicant an opportunity of being heard before making a reference to the T.P.O. under Section 92CA(1) - Whether the A.O. must provide an opportunity of being heard to the taxpayer before recording his satisfaction or otherwise ? - HELD THAT - If the C.B.D.T. itself has accepted the dictum as laid by the Bombay High Court in Vodafone India Services (P) Ltd 2014 (10) TMI 278 - BOMBAY HIGH COURT and in Indorama Synthetics 2016 (8) TMI 151 - DELHI HIGH COURT then we see no good reason to take the view that no opportunity of hearing is required to be given to the taxpayer by the A.O. before recording his satisfaction or otherwise. Undoubtedly in the case on hand a show cause notice was issued by the A.O. and reply was filed by the assessee i.e. the writ applicant and considering the reply the A.O. thereafter proceeded to pass the order of reference to the T.P.O. We are of the view that an opportunity of hearing should have been given by the A.O. before he proceeded to overrule all the objections and refer the matter to the T.P.O. No satisfaction being recorded in the order disposing of the objections - We find substance in the contention raised as A.O. could be said to have overlooked or rather ignored the jurisdictional requirement of a satisfaction in accordance with para 3.4 of the instruction No.3 of 2016 referred to above that there ought to be an income or potential of an income arising and/or being affected on determination of the A.L.P. of an international transaction or specified domestic transaction. In the absence of such satisfaction being recorded in the order disposing of the objections the reference to the T.P.O. would also be without jurisdiction. We take notice of the fact that in the objections a specific plea in this regard was taken however we do not find a word in this regard in the order disposing of the objections. On this issue the only reply of the learned Senior Counsel appearing for the Revenue is that the same is self-serving and adherence the record. In other words the only argument is that the Arm s Length Price on the interest paid would have bearing on the income. We are not convinced with such stance of the Revenue. We allow the present writ application. The proceedings are remitted to the A.O. for fresh consideration of the matter and the issues as discussed in the present order. The A.O. shall give an opportunity of hearing to the assessee and thereafter proceed to pass a reasoned order or a speaking order dealing with the objections in accordance with law.

Summary

Issues Involved:
1. Opportunity of Hearing before Reference to Transfer Pricing Officer (TPO)
2. Jurisdictional Requirement of Satisfaction for Potential Income Impact

Detailed Analysis:

1. Opportunity of Hearing before Reference to Transfer Pricing Officer (TPO):

The writ applicant, a limited company, challenged the reference made by the respondent No.1 (Assessing Officer) to respondent No.2 (TPO) under Section 92CA(1) of the Income Tax Act for the computation of Arm’s Length Price (ALP), arguing that it was done without giving an opportunity of hearing. The applicant contended that the failure to disclose the international transaction of a loan of ?20 Crore in the Form 3CEB was the basis for the reference, which was made without the necessary jurisdictional satisfaction as required by para 3.4 of the instruction 3/2016.

The court analyzed the necessity of providing an opportunity of hearing before making a reference to the TPO. It referred to the Delhi High Court's judgment in Indorama Synthetics (India) Ltd, which emphasized that the Assessing Officer (AO) must provide a hearing to the taxpayer before making such a reference, especially when the taxpayer challenges the jurisdiction. The Delhi High Court disagreed with the Gujarat High Court's decision in M/s. Veer Gems, which stated that the AO is not obliged to hear the taxpayer before making a reference to the TPO.

The court noted that the CBDT had accepted the legal position as explained by the Bombay High Court in Vodafone India Services (P) Ltd, which required an opportunity of hearing to be given before making a reference to the TPO. Consequently, the court held that the AO should have provided an opportunity of hearing to the writ applicant before overruling the objections and referring the matter to the TPO.

2. Jurisdictional Requirement of Satisfaction for Potential Income Impact:

The court examined whether the AO had overlooked the jurisdictional requirement of recording satisfaction that there is an income or a potential of an income arising and/or being affected by the determination of the ALP of an international transaction, as mandated by para 3.4 of the instruction 3/2016. The writ applicant argued that the AO failed to record such satisfaction, making the reference to the TPO illegal and without jurisdiction.

The court referred to the CBDT's instruction No.3 of 2016, which replaced instruction No.15 of 2015, and emphasized the necessity of the AO recording satisfaction about the potential income impact before making a reference to the TPO. The court found that the AO did not record any satisfaction regarding the potential income impact in the order disposing of the objections, thereby failing to meet the jurisdictional requirement.

The court also referred to the Bombay High Court's decision in Vodafone India Services (P) Ltd, which held that tax can only be charged on income, and in the absence of any income arising, the issue of applying the measure of ALP to the transactional value does not arise. The court concluded that the AO's failure to record satisfaction as to the potential income impact rendered the reference to the TPO without jurisdiction.

Conclusion:

The court allowed the writ application, quashing the reference made by the respondent No.1 to respondent No.2 and the impugned notice dated 20th December 2019. The proceedings were remitted to the AO for fresh consideration, with a direction to provide an opportunity of hearing to the writ applicant and to pass a reasoned order dealing with the objections in accordance with law. The court agreed with the Revenue on the point of limitation, clarifying that the limitation period for assessment would be extended by the period during which the proceedings before the TPO were stayed.