2021 (3) TMI 1459 - AT - Income Tax

TP Adjustment - treating the enterprises as associated enterprises - Whether the assessee, Ambico UK and Narayan UK are AEs as defined u/s 92A? - HELD THAT - In the instant case, the DRP has held that the basic conditions laid down in sub-section (1)(b) of section 92A of the Act are satisfied, therefore, there is no need to travel to the provisions of sub-section(2) of section 92A. DRP further observed that there no requirement under the section to simultaneous satisfy the conditions set out in sub-section (1) (2). The DRP further went on to remark that drawing such an inference would render the provisions of section 92A(1) otiose. The observations of the DRP are contrary to the law settled by the Hon ble Apex Court and various decisions rendered by the Tribunal over the period of time. The Revenue has failed to make out a case that the assessee and the two foreign enterprises fall in any of the deeming provisions enlisted in clause (a) to (m) of sub-section (2) of section 92A of the Act. No hesitation in holding that the assessee, Ambico UK and Narayan UK do not fall within the definition of AE as defined u/s 92A - Hence, the transactions between the assessee and two foreign entities are outside the realm of TP provisions. We find merit in the contentions of the assessee. The ground No. 1 of the appeal is allowed, accordingly. Validity of reference to TPO u/s 92CA(1) - Whether proper show cause notice was served to the assessee by the Assessing Officer before making reference to TPO under section 92CA(1)? - Opportunity of hearing is a procedural requirement implicit in section 92CA(1) of the Act. The Hon ble High Court in the case of Indorama Synthetic (India) Ltd. 2016 (8) TMI 151 - DELHI HIGH COURT set aside the references made to TPO in the impugned assessment years and referred the issue back to the Assessing Officer for fresh determination after affording opportunity of hearing to the assessee. The present case undisputedly falls under one of the three situations listed by the CBDT where opportunity of hearing should have been granted by the Assessing Officer before making reference to the TPO. As is evident from records, no show cause notice was ever served on the assessee by the AO before making reference to the TPO. AO only directed the assessee through order sheet entry to file and affidavit of Harshad Danesh Patel. The reference made to TPO by the Assessing Officer suffers from infirmity. Consequently, the said reference is liable to be set aside. In the present case, since, we have held that the Revenue has not been able to prove that there is an international transaction between associated enterprises , setting aside reference u/s 92CA(1) and restoring the issue to AO for allowing opportunity to the assessee of being heard after issuing notice on making reference would be an exercise in futility. In the light of our decision on ground no.1 of appeal, the ground no.2 of appeal has become academic.

Summary

Issues Involved
1. Whether the assessee, Ambico UK and Narayan UK are Associated Enterprises (AEs) as defined under section 92A of the Income Tax Act.
2. Whether proper show cause notice was served to the assessee by the Assessing Officer before making reference to the Transfer Pricing Officer (TPO) under section 92CA(1) of the Act.

Issue-wise Detailed Analysis

Issue 1: Determination of Associated Enterprises (AEs)
The primary issue revolves around whether the assessee's transactions with Ambico UK and Narayan UK fall under the purview of Transfer Pricing provisions, specifically if these entities qualify as Associated Enterprises (AEs) under section 92A of the Income Tax Act.

Legal Framework and Interpretation:
- Section 92A(1) defines "associated enterprise" based on participation in management, control, or capital.
- Section 92A(2) lists specific scenarios (clauses (a) to (m)) that further clarify when enterprises are deemed to be AEs.

Arguments by the Assessee:
- The assessee argued that Ambico UK and Narayan UK do not meet the criteria specified in section 92A(2), despite any participation in management, control, or capital.
- The assessee cited several Tribunal decisions (Orchid Pharma Ltd., ACIT vs. Veer Gems, Kaybee Pvt. Ltd., Page Industries Ltd.) to support the argument that both subsections (1) and (2) of section 92A must be read together.

Arguments by the Revenue:
- The Revenue contended that the common shareholding and control by Harshad Danesh Patel in both the Indian and UK entities qualify them as AEs under section 92A(1)(b).

Tribunal's Findings:
- The Tribunal emphasized that section 92A(1) and 92A(2) must be read together, and both conditions must be satisfied for entities to be considered AEs.
- Citing multiple precedents, the Tribunal concluded that the mere fact of participation in management, control, or capital is insufficient without meeting the specific conditions in section 92A(2).

Conclusion:
- The Tribunal held that the assessee, Ambico UK, and Narayan UK do not qualify as AEs under section 92A, as the conditions in section 92A(2) were not satisfied.
- Consequently, the transactions between these entities are outside the realm of Transfer Pricing provisions, and the ground No. 1 of the appeal was allowed.

Issue 2: Proper Show Cause Notice Before Reference to TPO
The second issue concerns whether the Assessing Officer provided a proper show cause notice to the assessee before referring the matter to the TPO under section 92CA(1).

Arguments by the Assessee:
- The assessee claimed that no formal show cause notice was issued, only a direction to file an affidavit, which does not fulfill the requirement of a proper notice.
- The assessee cited CBDT Instruction No. 3/2016, which mandates providing an opportunity of hearing before making a reference to the TPO.

Arguments by the Revenue:
- The Revenue argued that the assessee was given opportunities to file objections through order sheet entries and participated in the TP proceedings without raising further objections.

Tribunal's Findings:
- The Tribunal referred to CBDT Instruction No. 3/2016 and relevant case law (Indorama Synthetics (India) Ltd. vs. Addl. CIT, Vodafone India Services Pvt. Ltd. vs. Addl. CIT) to assert that a proper show cause notice is a procedural requirement implicit in section 92CA(1).
- The Tribunal found that the Assessing Officer failed to issue a proper show cause notice, which is a foundational requirement for legal proceedings.

Conclusion:
- The Tribunal concluded that the reference to the TPO was procedurally flawed due to the lack of a proper show cause notice, rendering the reference invalid.
- Given the Tribunal's decision on the first issue, the second issue became academic, and the reference to the TPO was set aside.

Final Judgment
The appeal by the assessee was partly allowed. The Tribunal ruled that the assessee, Ambico UK, and Narayan UK are not Associated Enterprises under section 92A, and the reference to the TPO was procedurally incorrect due to the absence of a proper show cause notice. The order was pronounced in the open court on March 30, 2021.