2019 (7) TMI 173 - AT - Income Tax

TP adjustment in assessment u/s 153A - jurisdiction by the AO/TPO and the powers of DRP - effect of non issue of SCN by AO regarding reference of an independent to / and non existing international transactions - HELD THAT - There is no merit in arguments of Ld. DR that the Assessing Officer has only made reference in respect of transactions which are already reported in Form No.3CEB. The facts clearly show that what the Assessing Officer has referred is not only the transactions declared in Form No.3CEB but the transactions which as per the Revenue authorities starting from Investigation Team and other Officers needs to be benchmarked in the hands of assessee i.e. on account of sale of medicines by Sava group and other AEs, which are independent entities duly registered in the respective countries as per the laws of said countries. where the Assessing Officer came to a finding that second transaction needs to be benchmarked by the TPO, then before making reference to TPO, it was incumbent upon the Assessing Officer to show cause the assessee, whether it was necessary and expedient to refer the matter to TPO, which the Assessing Officer has failed to do so. Though the Assessing Officer records reasons and even gets those reasons approved by CIT and clearly mentions the reasons for reference in the referral letter but fails to show cause the same to assessee. The said act of Assessing Officer is in contradiction to the provisions of section 92CA(1). The copy of said reference letter was never given to the assessee either during the course of assessment proceedings / TP proceedings or DRP proceedings. The assessee has time and again objected to the exercise of powers by TPO alleging that no international transaction arises on the premise of benchmarking transaction of control and management of AE parties from India and that too, through assessee s hands, but the said objection has not been dealt with by TPO or DRP and an order under section 92CA(3) of the Act passed by TPO, which has been partially modified by DRP. After such an order has been passed, the Assessing Officer, as per amended provisions of section 92CA(4) is bound to act in conformity with the said adjustment made. This is the mandate of section 92CA(4). Hence, the jurisdictional issue raised by assessee i.e. whether it is an international transaction or not has not been answered by any of the authorities and the TP proceedings have been completed against assessee in violation of mandate of section 92CA(1). We hold that where the Assessing Officer while making reference of an independent to / and non existing international transactions (as alleged by Ld. AR) had to come to a finding that income arising from the said international transactions needs to be benchmarked, in order to determine its arm's length price and before such reference to the TPO, show cause notice should have been given to the assessee. In the absence of any such show cause notice being given to assessee, the same is irregularity (as held by the Hon ble Bombay High Court) and the said irregularity cannot be made good by restoring back the same to the file of Assessing Officer as none of the authorities i.e. Assessing Officer or DRP thought it fit to address the issue raised by assessee and disregarded the same in limine. It is the case of violation of principles of natural justice and such an order passed in the hands of assessee cannot stand and the same is invalid and bad in law. Exercise of powers by TPO - The TPO in the present facts has first, carried out exercise to conclusively prove that entire control and management of the affairs of assessee group, was wholly situated in India and then in the end, he applies Profit Split Method, which also had not been applied as per rules, as no comparables had been picked up to benchmark the said international transactions. The exercise carried out by TPO in fact is the exercise which had to be undertaken by Assessing Officer in the first instance and after he had come to a finding of control and management of business being wholly situated in India during the previous years in question, then he had to proceed further. The Assessing Officer having failed to do so, action of TPO being beyond jurisdiction cast under section 92CA(1) of the Act cannot stand and hence, the entire exercise carried out by TPO in this regard is both invalid and bad in law. where under the provisions of the Act it is prescribed that a particular Officer is to exercise a power, then it has to be so exercised by him and no other person, unless the Statute so prescribes. In the present set of facts, the said exercise has not been carried out by the Assessing Officer, but if we go through the order of TPO, then such a finding has been given by TPO in various paras of TPO s order. The Assessing Officer was aware of whole background, which is clear from reference made by him to TPO and in such circumstances, he should have exercised his jurisdiction. He has failed to do so and on this ground also, the non exercise of jurisdiction by Assessing Officer makes the assessment order bad in law. Taxability on the basis of status of residence of an entity - It was his duty first, to come to a finding whether such transactions undertaken by assessee and other concerns were inter-linked and first, he should have determined whether the conditions of section 6(3) of the Act were fulfilled or not and then make reference, if needed. Hence, there is no merit in the whole exercise carried out by TPO and also in non exercise of jurisdiction by Assessing Officer, which affects the jurisdiction of Assessing Officer to make assessment. Even the DRP did not address this issue. In the present case, since the Assessing Officer has failed to apply the law correctly, we find no merit in the consequent orders passed against assessee and the same do not stand and are held to be bad in law. Thus, first issue raised by assessee is allowed. Powers of DRP - Panel may confirm, reduce or enhance the variation proposed in draft order and it has no power to set aside any proposed variation or issue any direction under sub-section (5) for further enquiry and passing of assessment order - sub-sections (5) to (8) of section 144C - powers which have to be exercised by DRP are not as wide as the powers which can be exercised by CIT(A) - HELD THAT - It first challenges the order of TPO on the ground that no such international transaction exists and cannot be benchmarked. The DRP does not deal with the same. The next challenge was to the finding of TPO vis- -vis control and management from India. The DRP while deciding the issue first, decides the issue of international transaction of supply of goods, which is reported in Form No.3CEB. It may again be pointed out that the TPO does not give any finding on this issue though the said transaction is reported in Form No.3CEB. But where the TPO has not exercised his jurisdiction, the DRP in exercise of his powers cannot benchmark new transaction though reported by assessee, in the hands of assessee. The DRP benchmarks the second transaction in the hands of assessee and overturns the order of TPO and holds that AE's are not sham, but are legal entities and attributes part of global profits, first to the assessee and then another part to AE s and the residuary profits are divided amongst the assessee and AE s. In the result, 70% of world profits are added in the hands of assessee under guise of Profit Split Method. The rules in this regard are completely overlooked and no comparables are selected and on its own, allocation of profits is made by the DRP. The said exercise carried out by DRP is beyond its scope and is new line of adjustment, which is outside its jurisdiction. The DRP has also failed to consider the aspect that no such transaction was reported in Form No.3CEB by the assessee and has failed to address the issue raised by assessee. In this regard, we find no merit in the exercise of jurisdiction by the DRP. The Ld. DR has placed reliance on several case laws in this regard, explaining the powers of DRP, but those are distinguishable on facts. Accordingly, we quash the findings of DRP and consequent order passed under section 143(3). Both the jurisdictional issues are thus, decided in favour of assessee and assessment order passed in the case is held to be invalid and bad in law.

Summary

Issues Involved:

1. Jurisdiction of the Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP).
2. Requirement of satisfaction and opportunity of hearing by the Assessing Officer (AO) before making a reference to the TPO.
3. Benchmarking of international transactions and the scope of TPO's powers.
4. Determination of control and management of the assessee's affairs.
5. Application of the Profit Split Method (PSM) by the TPO and DRP.
6. Enhancement powers of the DRP.

Issue-wise Detailed Analysis:

1. Jurisdiction of the TPO and DRP:

The TPO's jurisdiction was challenged on the grounds that he exceeded his powers by determining the control and management of the assessee's affairs. The TPO concluded that the entire control and management of the assessee group were situated in India, which was beyond the scope of his jurisdiction. The DRP, while modifying the TPO's order, held that the AEs were not sham entities and attributed part of the global profits to the assessee. The Tribunal held that the TPO's exercise was beyond his jurisdiction, and the DRP's modifications were also beyond its scope.

2. Requirement of Satisfaction and Opportunity of Hearing by the AO:

The Tribunal emphasized the importance of the AO providing an opportunity of hearing to the assessee before making a reference to the TPO. The AO should form a prima facie opinion about the necessity and expediency of referring the matter to the TPO. The Tribunal relied on the jurisdictional High Court's decision in Vodafone India Services Pvt. Ltd., which mandates that the AO must consider the assessee's objections to the applicability of Chapter X before making a reference to the TPO.

3. Benchmarking of International Transactions and Scope of TPO's Powers:

The TPO's role is to determine the arm's length price (ALP) of international transactions reported by the assessee. In this case, the TPO went beyond his jurisdiction by determining the control and management of the assessee's affairs and applying the Profit Split Method (PSM) without considering external comparables. The Tribunal held that the TPO's exercise was invalid and beyond his powers under section 92CA(1) of the Act.

4. Determination of Control and Management of the Assessee's Affairs:

The TPO's determination that the control and management of the assessee's affairs were situated wholly in India was beyond his jurisdiction. The Tribunal held that such a determination is within the domain of the AO under section 6(3) of the Act. The TPO's findings on this issue were invalid and beyond his scope of authority.

5. Application of the Profit Split Method (PSM) by the TPO and DRP:

The TPO applied the PSM to benchmark the international transactions, attributing 97% of the global profits to the assessee. The DRP modified the TPO's order and attributed part of the global profits to the AEs. The Tribunal held that the TPO's application of the PSM was beyond his jurisdiction, and the DRP's modifications were also beyond its scope. The Tribunal emphasized the need for external comparables while applying the PSM, which was not done in this case.

6. Enhancement Powers of the DRP:

The DRP's powers are limited to confirming, reducing, or enhancing the variations proposed in the draft order. The DRP cannot introduce new sources of income or benchmark new transactions not considered by the TPO. The Tribunal held that the DRP exceeded its jurisdiction by benchmarking new transactions and attributing part of the global profits to the assessee. The DRP's exercise of powers was beyond its scope, and the consequent order was invalid.

Conclusion:

The Tribunal quashed the orders passed by the TPO and DRP, holding that the entire exercise carried out by the TPO was beyond his jurisdiction, and the DRP's modifications were also beyond its scope. The assessment order passed in the case was held to be invalid and bad in law. The Tribunal emphasized the importance of the AO providing an opportunity of hearing to the assessee before making a reference to the TPO and the need for the TPO to stay within his jurisdiction while determining the ALP of international transactions.