2025 (3) TMI 949 - HC - Income Tax

Reference to TPO w/o providing opportunity for the petitioner to be heard - validity of Notice to transfer case to TPO u/s 92CA and transfer of case to the TPO as per the approval granted by the Principal Commissioner of Income Tax-1 - HELD THAT - Respondent no. 1 has made a proposal dated 24.12.2019 in a great hurry after issuing notice under section 142 (1) of the Act calling upon the petitioner to furnish the accounts and documents specified therein on or before 24.12.2019 at 12 15 PM as per Annexure to such notice. Respondent no. 1 made a proposal to the Principal Commissioner of Income Tax-1 on the next day i.e. 24.12.2019 wherein it is recorded that one more opportunity was provided vide notice dated 23.12.2019 fixing the date of hearing on 24.12.2019 however in response no one attended and no reply was received. Reasons for making transfer was also recorded on 24.12.2019 and thereafter the Principal Commissioner of Income Tax granted approval also on 24.12.2019. Thus the petitioner was never provided any opportunity to make submissions as per notice dated 23.12.2019. It is apparent that while making reference to the respondent no. 2 respondent no. 1 has overlooked and ignored the jurisdictional requirement of providing an opportunity of hearing in accordance with para no. 3.4 of the Instruction No. 3 of 2016 when there ought to be income or a potential of an income arising and/or being affected on determination of the ALP of an international transaction or specified domestic transaction and merely reliance was placed on the Assessment Year 2016-2017. It is also emerging from the undisputed facts of the case that further opportunity of hearing granted on 23.12.2019 was only an empty formality resulting into breach of principle of natural justice. For the foregoing reasons the petition succeeds. The impugned reference made by respondent no. 1 to respondent no. 2 is hereby quashed and set aside and notice as well as the approval granted by Principal Commissioner of Income Tax dated 24.12.2019 are hereby quashed and set aside.

Summary

1. ISSUES PRESENTED and CONSIDERED

The primary legal issues considered in this judgment include:

• Whether the Assessing Officer (AO) was required to provide an opportunity for the petitioner to be heard before making a reference to the Transfer Pricing Officer (TPO) under Section 92CA(1) of the Income Tax Act, 1961.
• Whether the AO complied with the jurisdictional requirement of recording satisfaction that there is an income or potential income arising from the determination of the Arm's Length Price (ALP) of an international transaction or specified domestic transaction as per CBDT Instruction No. 3 of 2016.
• Whether the transactions between the petitioner's head office and its overseas branches qualify as international transactions under the provisions of the Income Tax Act, 1961.
• Whether the reference made to the TPO was in accordance with the legal framework, including the adherence to principles of natural justice.

2. ISSUE-WISE DETAILED ANALYSIS

Legal Framework and Precedents:

The relevant legal framework involves Section 92CA of the Income Tax Act, 1961, which allows the AO to refer the computation of ALP to the TPO. CBDT Instruction No. 3 of 2016 outlines circumstances under which such a reference can be made, emphasizing the need for the AO to record satisfaction of potential income impact and to provide the taxpayer an opportunity to be heard.

Court's Interpretation and Reasoning:

The Court emphasized the necessity for the AO to provide a hearing opportunity to the taxpayer before making a reference to the TPO, aligning with the principles of natural justice. The Court referred to precedents, including decisions from the Delhi High Court and Bombay High Court, which support the requirement of providing a hearing opportunity.

Key Evidence and Findings:

The Court found that the AO issued a notice late at night on 23.12.2019, requiring compliance by 12:15 PM on 24.12.2019, which effectively denied the petitioner a real opportunity to be heard. The Court noted that the AO's actions were in haste and did not comply with the procedural requirements outlined in the CBDT instructions.

Application of Law to Facts:

The Court applied the principles of natural justice and the procedural requirements of CBDT Instruction No. 3 of 2016, determining that the AO failed to provide the petitioner with a meaningful opportunity to present their case. The lack of a proper hearing and the hurried manner in which the reference was made to the TPO were significant factors in the Court's decision.

Treatment of Competing Arguments:

The petitioner argued that the transactions with overseas branches did not constitute international transactions and that there was no income impact. The respondent contended that the reference to the TPO was justified based on previous assessments and potential income impact. The Court found merit in the petitioner's arguments regarding procedural deficiencies and the lack of a proper hearing.

Conclusions:

The Court concluded that the AO's reference to the TPO was procedurally flawed due to the lack of a proper hearing and the failure to record satisfaction as required by the CBDT instructions. The Court quashed the reference and remitted the matter to the AO for fresh consideration.

3. SIGNIFICANT HOLDINGS

Verbatim Quotes of Crucial Legal Reasoning:

"The impugned reference made by respondent no. 1 to respondent no. 2 is hereby quashed and set aside and notice dated 30.12.2019 as well as the approval granted by Principal Commissioner of Income Tax dated 24.12.2019 are hereby quashed and set aside."

Core Principles Established:

• The necessity for the AO to provide a taxpayer with an opportunity to be heard before making a reference to the TPO, in line with principles of natural justice.
• The requirement for the AO to record satisfaction regarding potential income impact as per CBDT Instruction No. 3 of 2016.
• The importance of adhering to procedural requirements and ensuring a fair hearing process.

Final Determinations on Each Issue:

• The Court determined that the AO failed to provide the petitioner with a proper hearing opportunity before referring the case to the TPO.
• The Court found that the AO did not comply with the jurisdictional requirements of recording satisfaction regarding income impact, as outlined in CBDT Instruction No. 3 of 2016.
• The Court quashed the reference to the TPO and remitted the matter to the AO for fresh consideration with a directive to provide a fair hearing and adhere to procedural requirements.