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2016 (10) TMI 326 - HC - Income TaxPenalty under section 271(G)- existence of international transaction - Reference to TPO - Held that - In view of the fact that the reference to the TPO has already been made after obtaining the approval of the Pr.CIT the objection raised by the petitioner may be taken before the DRP or the CIT(A) as the case may be. It is necessary however now to consider the nature of the order to be passed. As the provisions of the Act and of the circular have not been complied with strictly and the matter already stands referred to the TPO it is necessary to protect the petitioner in certain aspects. Normally the petitioner would have had an opportunity of contending that the transactions are not international transactions as they are not with its associated enterprises before the Assessing Officer himself. That stage having passed it is only fair that if the petitioner chooses the DRP route or the CIT(A) route the DRP or the CIT(A) as the case may be ought to first adjudicate the question as to whether the said transactions are international transactions or not. If they come to the conclusion that they are not international transactions certain consequences may follow which we keep open for the petitioner to take before the DRP or the CIT(A) as the case may be. We clarify that in the event of the CIT(A) or the DRP coming to the conclusion that they are international transactions it would not be necessary for them to stall the proceedings and they may proceed to decide them finally. The penalty proceedings under section 271(G) have been initiated on the basis that the provisions of Chapter-X and in particular Sections 92D and 92E have not been complied with. As we noted earlier the petitioner did not have an opportunity of representing its case to the effect that these transactions are not international transactions. It is only fair then that while the penalty proceedings may continue the order imposing penalty if any shall not be implemented till the decision of the DRP or the CIT(A) as the case may be on the preliminary issue as to whether it is an international transaction or not.
Issues Involved:
1. Jurisdiction of the Assessing Officer (AO) to refer transactions to the Transfer Pricing Officer (TPO). 2. Requirement of a reasoned order and opportunity of hearing before reference to TPO. 3. Applicability of Chapter-X of the Income Tax Act, 1961 to the transactions. 4. Compliance with Central Board of Direct Taxes (CBDT) circular dated 10.03.2016. 5. Validity of proceedings before the TPO and subsequent assessment proceedings. 6. Penalty proceedings under Section 271(G). Issue-wise Detailed Analysis: 1. Jurisdiction of the Assessing Officer (AO) to refer transactions to the Transfer Pricing Officer (TPO): The petitioner sought to quash the reference made by the AO to the TPO, arguing that the transactions were not with associated enterprises, making the proceedings void. The court noted that the first respondent (AO) issued a show-cause notice and recorded satisfaction based on documents found during a survey, indicating under-invoicing of sales to group companies and non-filing of the accountant’s report under Section 92E. 2. Requirement of a reasoned order and opportunity of hearing before reference to TPO: The court emphasized that the AO must provide the assessee an opportunity to show cause and pass a reasoned order before making a reference to the TPO. This was supported by the Bombay High Court judgment in Vodafone India Service Pvt. Ltd. v. Union of India, which stressed the necessity of deciding objections to the applicability of Chapter-X before referring transactions to the TPO. 3. Applicability of Chapter-X of the Income Tax Act, 1961 to the transactions: The court held that the AO must decide whether the transactions are international transactions before referring them to the TPO. The satisfaction note must include reasons for the reference, and the assessee should have the opportunity to contest this determination before the AO, and subsequently before appellate authorities if necessary. 4. Compliance with Central Board of Direct Taxes (CBDT) circular dated 10.03.2016: The court referred to the CBDT circular, which mandates that the AO must record satisfaction and provide an opportunity of being heard to the taxpayer before referring transactions to the TPO. The circular requires a reasoned order to comply with the principles of natural justice. 5. Validity of proceedings before the TPO and subsequent assessment proceedings: The court concluded that the satisfaction recorded by the AO contained sufficient reasons, and any challenge to the correctness of the satisfaction should be taken up in proceedings under the Act, not in a writ petition. The court rejected the contention that the reference to the TPO was void ab initio due to non-service of the satisfaction note before the reference. 6. Penalty proceedings under Section 271(G): The court noted that penalty proceedings were initiated based on non-compliance with Chapter-X provisions. The court directed that while penalty proceedings may continue, the implementation of any penalty order should be stayed until the DRP or CIT(A) decides whether the transactions are international transactions. Conclusion: The writ petition was dismissed. The court provided that the petitioner could raise objections before the DRP or CIT(A), who must first adjudicate whether the transactions are international transactions. Penalty orders, if any, should not be implemented until the preliminary issue is decided. The court ensured that the assessee's rights were protected by allowing objections to be raised at appropriate stages and ensuring compliance with procedural requirements.
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