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TMI Blog2021 (3) TMI 1459X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 recor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to make a reference to the Learned Transfer Pricing Officer under section 92CA(1) of the ACT for determining arms length price on transactions with Narayan Foods Limited and Ambico Exports and Imports Private Limited (UK) without providing an opportunity to Your Assessee to herd in the matter. 4. The ld. Authorized Representative of the assessee narrating the facts of case submitted that the assessee is engaged in trading of diamonds, export and import of chemicals, rough diamonds, general items and processing cutting and polishing of rough diamonds. During the period relevant to assessment year under appeal, the assessee entered into transactions with Ambico Exports Imports Pvt. Ltd. UK (in short Ambico UK) and Narayan Foods Ltd. UK (in short Narayan UK). Since, the aforesaid entities are not Associated Enterprise (AE) within the meaning of section 92A of the Act, the transactions with the said entities were not reported in Transfer Pricing Study. 4.1 The ld. Authorized Representative of the assessee submitted that the Transfer Pricing Officer (TPO) has erred in making adjustment of Rs. 1,68,66,580/- by holding that the assessee has entered into international transactions with it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not served any show cause notice on assessee before making reference to TPO under section 92CA (1) of the Act. He asserted that the basic principle of natural justice was violated before invoking the provisions of Chapter-10 of the Act. The ld. Authorized Representative of the assessee pointed that the CBDT had issued guidelines for implementation of TP provisions vide Instruction No. 3/2016 dated 10/03/2016 wherein, it has been categorically mentioned that where the Assessing Officer has to make reference to the TPO, the Assessing Officer as a jurisdictional requirement is mandatorily required to record his satisfaction. Before recoding satisfaction for making reference to the TPO, it is obligatory for the Assessing Officer to provide opportunity of hearing to the assessee. The ld. Authorized Representative of the assessee submitted that in the present case, the only so called opportunity that was given to the assessee by the Assessing Officer was through order sheet entry dated 07/03/2016. As per said entry the assessee was directed to file an affidavit of Harshad Danesh Patel regarding no association with Ambico UK and Narayan UK. The direction to file an affidavit cannot be re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to make out a case in its favour. The assessee thereafter, participated in the TP proceedings without raising any further objection. The ld. Departmental Representative prayed for dismissing the appeal filed by the assessee. 6. We have heard the submissions made by rival sides and have examined the orders of authorities below. The two issues that have been agitated by the assessee before us are: (i) Whether the assessee, Ambico UK and Narayan UK are AEs as defined under section 92A of the Act; and (ii) Whether proper show cause notice was served to the assessee by the Assessing Officer before making reference to TPO under section 92CA(1) of the Act. 7. We will first take issue raised in ground No. 1 of the appeal. Before proceeding further it would be relevant to refer to the meaning of Associated Enterprises as defined under section 92A of the Act. 92A (1) For the purposes of this section and sections 92, 92B, 92C, 92D, 92E and 92F, associated enterprise , in relation to another enterprise, means an enterprise (a) which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; or (b) in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y one enterprise, are sold to the other enterprise or to persons specified by the other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprise; or (j) where one enterprise is controlled by an individual, the other enterprise is also controlled by such individual or his relative or jointly by such individual and relative of such individual; or (k) where one enterprise is controlled by a Hindu undivided family, the other enterprise is controlled by a member of such Hindu undivided family or by a relative of a member of such Hindu undivided family or jointly by such member and his relative; or (l) where one enterprise is a firm, association of persons or body of individuals, the other enterprise holds not less than ten per cent interest in such firm, association of persons or body of individuals; or (m) there exists between the two enterprises, any relationship of mutual interest, as may be prescribed . The sub-section (1) of section 92A of the Act lays down basic rules for treating enterprises as AE. As per provisions of sub-section (1), management or control or capital are the three basic parameters that determines whether the two en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t two or more enterprise are associated enterprise or not. The principle is, as we have noted above, that one of the enterprise, in relation to other enterprise, participate, directly or indirectly, in the management or control or capital of the other enterprise and that persons who participate in such management, control or capital of both the enterprises are common. As long as an enterprise participates in any of the three aspects of the other enterprise, i.e. (a) management; (b) capital; or (c) control, these enterprises are required to be treated as associated enterprise, as also is the position when common persons participate in management, control or capital of both the enterprises. However, the expression participation in management or capital or control is not a defined expression. To find the meaning of this expression, one has take recourse to Section 92(2) which gives practical illustrations, which are exhaustive and not simply illustrative- as clarified in the Memorandum explaining the provisions of the Finance Bill 2002 which, while inserting the words For the purpose of sub section (1) of section 92A in Section 92A(2), observed that It is proposed to amend subsection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise . Section 92(A)(2) only provides illustrations of the cases in which such an enterprise participates in management, capital or control of another enterprise. In other words, what Section 92A (1) decides is the principle on the basis of which one has to examine whether or not two or more enterprise are associated enterprise or not. The principle is, as we have noted above, that one of the enterprise, in relation to other enterprise, participate, directly or indirectly, in the management or control or capital of the other enterprise and that persons who participate in such management, control or capital of both the enterprises are common. As long as an enterprise participates in any of the three aspects of the other enterprise, i.e. (a) management; (b) capital; or (c) control, these enterprises are required to be treated as associated enterprise, as also is the position when common persons participate in management, control or capital of both the enterprises. However, the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... while dismissing the SLP filed by the Revenue has approved the decision of Hon'ble Gujarat High Court. Thus, the view taken by the Tribunal, that the provisions contained in sub-section (1) and sub-section (2) of section 92A have to be read in conjunction, has attained finality. 11. In a recent decision the coordinate Bench of the Tribunal in the case of Kaybee Pvt. Ltd vs ITO (supra) has distinguished the decision of Tribunal in the case of Diageo India Pvt. Ltd. vs. DCIT 47 SOT 252 and followed the decision of Hon ble Gujrat High Court in the case of Veer Gems (supra). The Bench after emphasizing the importance of maintaining judicial discipline in following the decisions of higher forums, finally concluded by observing: 18. Learned representatives fairly agree that the case of the Assessing Officer hinges only on application of Section 92A(1) and it does not meet any of the specific conditions set out in Section 92A(2). Once we hold that Section 92A(1) cannot be applied on standalone basis, and has to be essentially considered in conjunction of Section 92A(2) only when it satisfies at least one of the conditions set out therein, it is clear that the relationship between the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t has been categorically mentioned in the CBDT Instruction that Assessing Officer must provide an opportunity of hearing to the assessee before recording his satisfaction in the following three situations: - where the taxpayer has not filed the Accountant's report under section 92E of the Act but the international transactions or specified domestic transactions undertaken by it come to the notice of the AO; - where the taxpayer has not declared one or more international transaction or specified domestic transaction in the Accountant's report filed under section 92E of the Act and the said transaction or transactions come to the notice of the AO; and - where the taxpayer has declared the international transactions or specified domestic transactions in the Accountant's report filed under section 92E of the Act but has made certain qualifying remarks to the effect that the said transactions are not international transactions or specified domestic transactions or they do not impact the income of the taxpayer. In case, no objection is raised by the assessee to the application of provisions of Chapter-10 of the Act, then the Assessing Officer should refer international transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 CA (1) of the Act. Accordingly, the said three references made by the AO to the TPO for determination of the said question for the AYs 2011-12, 2012-13 and 2013-14 are hereby set aside. 24. The question of whether or not a reference should be made to the TPO, for the three AYs in question, will now be determined by the AO afresh after giving the Petitioner an opportunity of being heard in respect of each of the AYs within the next 15 days. At least one week's advance notice be given to the Petitioner of the exact date of hearing before the AO. 25. After hearing the Petitioner, and within a period of four weeks after the conclusion of such hearing, the AO will issue a fresh order stating whether the AO considers it necessary and expedient to make a reference to the TPO on the question of determination of the ALP of the international transactions, if any, involving the Petitioner. The said decision will be communicated forthwith to the Petitioner and in any event not later than one week from the date it is issued. 26. If aggrieved by such decision, it will be open to the Petitioner to seek appropriate relief which may be available to the Petitioner in accordance with law. The H ..... X X X X Extracts X X X X X X X X Extracts X X X X
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