9911796707
TMI Blog2025 (3) TMI 949X X X X Extracts X X X X X X X X Extracts X X X X ..... after 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. X X X X Extracts X X X X X X X X Extracts X X X X ..... eference to respondent no. 2 under section 92CA (3) of the Act. 9. The petitioner thereafter received notice dated 30.12.2019 from respondent no. 2. The petitioner raised objections to such notice vide letter dated 27.1.2020. It is the case of the petitioner that the petitioner had not received any order disposing off the objections. 10. It is the case of the petitioner that respondent no. 2 without dealing with the objections raised by the petitioner has issued further show cause notice dated 24.01.2021. 11. Being aggrieved by the action of the respondents, the petitioner has preferred the present petition. Relevant provisions: 12. Section 92CA reads as under: "92CA. [Reference to Transfer Pricing Officer (1) Where any person, being the assessee, has entered into an international transaction or specified domestic transaction in any previous year, and the Assessing Officer considers it necessary or expedient so to do, he may, with the previous approval of the Principal Commissioner or Commissioner, refer the computation of the arm's length price in relation to the said international transaction or specified domestic transaction under section 92C to the Transfer Pricing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces: (a) where the AO comes to know that the taxpayer has entered into international transactions or specified domestic transactions or both but the taxpayer has either not filed the Accountant's report under section 92E at all or has not disclosed the said transactions in the Accountant's report filed; (b) where there has been a transfer pricing adjustment of Rs. 10 Crore or more in an earlier assessment year and such adjustment has been upheld by the judicial authorities or is pending in appeal; and (c) where search and seizure or survey operations have been carried out under the provisions of the Income-tax Act and findings regarding transfer pricing issues in respect of international transactions or specified domestic transactions or both have been recorded by the Investigation Wing or the AO. 3.4 For cases to be referred by the AO to the TPO in accordance with paragraphs 3.2 and 3.3 above, in respect of transactions having the following situations, the AO must, as a jurisdictional requirement, record his satisfaction that there is an income or a potential of an income arising and/or being affected on determination of the ALP of an international transaction or s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal transaction or specified domestic transaction. 16. It was submitted that speaking order disposing off the objections passed by respondent no. 1 was never served upon the petitioner and the same is made available along with the affidavit in reply filed in this petition at Annexure-R2 (page 179 to 184 of the petition). 17. It was therefore, submitted that there are no circumstances prescribed in Instruction No. 3 of 2016 in which the case of the petitioner may be referred to the Transfer Pricing Officer. 18. Reference was made to the reasons recorded by the respondent no. 1 for transferring the case to the TPO under section 92CA of the Act. It was submitted that as per para No. 3, it is recorded that petitioner was given an opportunity by letter dated 13.12.2019 to show cause as to why the case should not be referred to TPO and adjournment was sought till 25.12.2019 and reply was filed on 23.12.2019 by the petitioner stating that transaction is not covered under the provisions of section 92E of the Act and the same are not international transactions. It was submitted that further opportunity was provided by notice dated 23.12.2019 fixing the hearing on 24.12.2019. 19. Learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Exim (P.) Ltd. v. Deputy Commissioner of Income tax, Cen Cir.-12, Mumbai reported in (2017) 85 taxmann.com 338 (Mumbai-Trib), wherein in case of Durian, it was observed by the Tribunal that section 92B(1) of the Act refers to an "international transaction" to be a transaction between two or more associated enterprises, "either or both of whom are non-residents". It was therefore, submitted that when the petitioner bank is resident in India, the transaction with its branches outside India cannot be covered by provisions of Chapter X of the Act. 23. It was therefore, submitted that even condition precedent provided as per para no. 3.4 of the Instruction No. 3 of 2016 is also not complied with as there is no element of profit involved in transaction between the petitioner's head office and its branches outside India. 24. It was further submitted that there is clear breach of principle of natural justice as notice dated 23.12.2019 was sent through email in late night of that day requiring the petitioner to remain present on the next date i.e. 24.12.2019 at 12:15 PM and as the petitioner obviously could not remain present at such a short notice and therefore, the petitioner was not pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that for Assessment Years 2018-2019 and 2019-2020 TPO has recognised such transactions which ought to have been reported but apart from that no upward adjustment has been made and therefore, in absence of any income impact, the impugned order is liable to be quashed and set aside. Submissions of the respondent: 29. Per contra, learned Senior Standing Counsel Mr. Varun K. Patel for the respondent submitted that the petition is filed at a pre-mature stage as only reference is made under section 92CA (1) of the Act to TPO for determining Arm's Length Price in relation to international transactions and TPO after providing full opportunity to the petitioner shall pass an order under sub-section (3) of section 92CA of the Act determining the Arm's Length Price in relation to international transaction or specified domestic transaction and thereafter, the Assessing Officer shall proceed to compute total income of the assessee in conformity with the ALP determined by TPO. It was therefore, submitted that the petitioner would be afforded adequate opportunity of hearing before TPO to demonstrate that international transaction has been entered into at ALP. It was further submitted that all p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sociated enterprises / overseas branches and was asked as to why the matter should not be referred to TPO regarding non-disclosure of such transactions. In response to the said notice, the Petitioner filed adjournment on 18.12.2019. Thereafter, the Petitioner filed reply on 23.12.2019. In the said reply, it can be seen from para 1.2 that the Petitioner is well aware of the fact that the issue emanates from TPO order for AY 2016-17. The Petitioner contended that the transactions with overseas branches / associated enterprises are not international transactions and that there is no escapement or potential escapement of income. However, the said matter was deliberated in length by the TPO in the order passed for AY 2016-17. Since the Respondent No. 1 -Assessing Officer is bound by the TPO order and facts for A.Y 2017-18 being identical, there is no reason for the Respondent No. 1 - Assessing Officer to hold a different view other than the one held by TPO. The said reply/ objection dated 23.12.2019 was dealt with by the assessing officer as can be seen from the notice cum order disposing of objections dated 23.12.2019 which the Petitioner consciously chose not to produce before this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted on determination of the ALP of an international transaction or specified domestic transaction. Therefore, the contention of Petitioner of satisfaction having not been recorded does not hold any merit. (v) With reference to para 3.3(c) and (d), I reiterate that the notice cum order disposing of objections dated 23.12.2019 was served upon the Petitioner which the Petitioner deliberately chose not to produce before this Hon'ble Court. In the said notice cum order disposing of objections dated 23.12.2019, the assessing officer has categorically referred to the exhaustive and detailed findings given by the TPO in the order passed us 92CA (3) for A.Y 2016-17 which clearly go to show that the Petitioner failed to disclose international transactions which were liable to be disclosed in the Accountant's report under Section 92E of the Act. The reliance placed by the Petitioner on various judgments is entirely misplaced and the said judgments have no applicability over the facts of the present case." 34. Referring to the above averments, it was further submitted that the contention raised on behalf of the petitioner that transaction with overseas branches are not transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argument of the assessee that the transfer pricing regulation applies if there is a transaction between a resident and a non-resident who are associated enterprises. It has clearly been demonstrated in the show cause notice that the law has created a deeming fiction in the definition of the word 'enterprise' which is defined in sec. 92F of the Act. By this deeming fiction although a Permanent Establishment (P.E) is the part of the same enterprise, however, for the purpose of transfer pricing regulation, the same is deemed to be an associated enterprise. Therefore, if there is a transaction between the head office and its branch office situated in Sri Lanka, what is required to be analysed is whether there is a transaction between two associated enterprises. Due to the fiction created by law as has been highlighted in the earlier part of this order, the P.E of the assessee has been treated as an associated enterprise as a separate person. Therefore, in this type of transaction, there are two entities involved. The status of the head office of course would be resident in India, however, the P.E/Branch office situated in Sri Lanka would be considered as a non-resident entity for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated in the other country would be taxable as per the provisions of Domestic Taxation law of that country for the income which has been earned by the PE in that country. Although the profits of the PE would be taken into account while computing the world wide income of the resident company, however, the credit for taxes paid in the other country would be provided in India and if the tax rate in India is higher, the residual tax (the difference between the tax paid in that country with the tax to be paid in India on doubly taxed income) is only required to be paid in India. If the tax rate in the other country is higher than the tax rate in India, the assessee is not required to pay any tax in India. For eg., if in case of a loan transaction between the HO and the PE situated outside India, say for eg. in Sri Lanka, the interest charged on such loan is at 5% whereas ALP of the interest should be 6%, the income of the PE based in Sri Lanka increases by 1% whereas if the same transaction is decided at ALP, the income of the PE in Sri Lanka gets reduced by 1% whereas the income of the HO in India consequently increases by 1%. If no transfer pricing exercise is undertaken in this transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Head Office by way of royalties, fees or similar payments are not to be allowed while computing the income of the PE on the principle of transacting with self. Therefore, even in the DTAAs, an exception has been carved out by way of which the interest payment to the HO by the PE engaged in the banking business is allowed to be claimed as a deduction while computing its income. The provisions of clause 7 (3) is being reproduced as under [clause 7 (3) of the Indo-Sri Lanka DTAA is being reproduced as the assessee company has a PE in Sri Lanka]: "In the determination of the profits of a permanent establishment, there shall be allowed as deduction expenses which are incurred for the purposes of the business of the permanent establishment including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere. However, no such deduction shall be allowed in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments, in return for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction. The assessee has also given an example to explain this point. However, the same is not applicable to the facts of this case in view of the following reasons : (1) The under invoicing/over invoicing would be revenue neutral as there would not be any effect of such transaction in the books of the H.O, is not based on the facts of the case as there would be tax payable on the income of the B.O in the respective country. As per the example given, if there is under invoicing of the goods, the B.O is liable to pay tax on the difference on which it has earned extra profit in that jurisdiction for which the credit of the taxes paid would have to be given by India. The tax base of India would be eroded to that extent. As per the example given by the assessee, Suppose the Indian head office purchases goods worth Rs. 95 and transfers the same to foreign branch office at Rs. WO, which are in turn sold by the branch office for a sum of Rs. 120. The profit of the head office will be Rs. 5 (Rs. 100 minus Rs. 95) and the profit of the branch office will be Rs. 20 (Rs. 120 minus Rs. WO). The Indian general enterprise will be chargeable to tax in India on its world income of Rs. 25 (Rs. 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g a suitable example of the assessee's Sri Lanka Branch in the earlier part of this order. Therefore, there is a clear base erosion and shifting of tax base from India to outside India. The transfer pricing regulations are squarely applicable to these situations. 6.3 It has further been argued by the assessee that to the best of their knowledge and information, none of the Indian banks are reporting such type of transactions to the tax authorities. This argument of the assessee is childish. If as per the provisions of the statute in force, a certain action is required to be taken by the assessee, it is not allowed to take the argument that since the other person is not following the law, the assessee also gets license not to follow the law. This argument of the assessee cannot be accepted at all. Regarding the argument that there being a reasonable bona fide interpretation, the assessee has not even bothered to give a note explaining its bonafide belief. There is no disclosure whatsoever by the assessee at all. Therefore, this argument of the assessee is also rejected 6.4 The other argument of the assessee that there was no intent or motive of tax avoidance, the same cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he modus operandi as to how the transactions are being entered into. All these transactions are relating to foreign currency exchange transactions. Obviously these transactions are required to be entered into at the prevailing market price. Admittedly, the assessee has not disclosed these transactions in form 3CEB. It is also not in dispute that these transactions are international transactions and have been entered into between two associated enterprises. Therefore, it was required to be disclosed by the assessee in form 3СEВ. 2. The assessee has taken the argument that mere exchange of foreign currency does not result into gain or loss and in absence of any income the transfer pricing proceedings are not applicable. The assessee is a dealer in a foreign exchange dealer in foreign exchange keeps on entering into transactions for buy and sell foreign currency. Obviously, the transactions by the dealer are being done to earn profit/income. The assessee is entering into foreign currency transaction with it's A.E. Even if the transactions are entered into at the market price, there is bound to be either the profit or the loss until and unless the assessee is entering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unting to Rs.27, 50, 85, 382/- which have not been disclosed in form 3CEB and the assessee has also failed to benchmark this transaction as per the provisions of the Act." 40. Respondent no. 1 has recorded the reasons for making reference under section 92CA of the Act as under : "4. In response the assessee sought for adjournment till 25.12.2019. Subsequently on 23.12.2019 the assessee filed reply stating that the transactions as mentioned in notice dated 13.12.2019 is not covered under provisions of section 92E and the same are not international transactions and that this is not a fit case for referring to TPO. The said transactions with overseas branch were mentioned at annexure 1A. 1B and 1C of reply dated 23, 12.2019. These transactions are summarised as under: Sr. NO. Particulars 1 Derivatives 2 Forex 3 Borrowing/lending 5. In this regard it is pertinent to mention that the said matter was discussed and deliberated at lengthy by the Ld TPO (Jt.DIT, TPO-1) vide order dtd 1.11.2019 for AY 2016-17 and the TPO has categorically directed the AO to initiate penalty u/s 271AA on the said transactions. Besides as per section 92CA(4), on receipt of order u/s 92CA (3) passe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In view of the above facts and on similar grounds and reasoning as mentioned in the order of TPO for AY 2016-17, I am satisfied that there is an 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. Hence this is a fit case for reference to PO for determination of ALP for international transactions." 41. On perusal of the above reasons together with the findings of the TPO for earlier Assessment Year 2016-2017 as reproduced here-in-above, it appears that the petitioner has failed to disclose international transaction involving derivatives, forex and borrowing/lending entered into with its overseas branches/Associated enterprise and there is an 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 which are not disclosed. In such circumstances, it would be for the TPO to determine the ALP and no fault can be found for referring the case to the TPO by respondent no. 1. 42. The contention raised on behalf of the petitioner that the case of the petitioner would not fall within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtunity of being heard to the taxpayer before recording his satisfaction or otherwise and relying upon the decision of the Bombay High Court in case of Vodafone India Services (P) Ltd v. Union of India reported in (2013) 39 TC 201 Bombay held that an opportunity of hearing must be given. Whereas, this Court in M/s. Veer Gems (supra) took the view that having regard to the provisions under Chapter X, the A.O. is not obliged in any manner to hear the assessee and only obligation on the part of the A.O. is to consider the objections of the assessee and only thereafter make a reference to the T.P.O. to compute the Arm's Length Price. 45. This Court thereafter considering the Instruction No. 3 of 2016 came to the conclusion that AO must provide an opportunity of being heard to the taxpayer before recording his satisfaction or otherwise accepting the dictum laid down by Bombay High Court in case of Vodafone India Services (P) Ltd (supra) and followed by Delhi High Court in case of Indorama Synthetics (India) Ltd (supra) and came to the conclusion that opportunity of hearing must be provided to the taxpayer. 46. Reference was also made to Instruction No. 2 of 2015 dated 29.01.2015 issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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. Notice dated 23.12.2019 and Annexure thereto reads as under: "Notice under sub-section (1) of section 142 of the Income Tax Act, 1961 Sir/ Madam/ M/s, In connection with the assessment for the assessment year 2017-18 you are required to: a) Furnish or cause to be furnished on, or before 24/12/2019 at 12:15 PM the accounts and documents specified overleaf. b) Furnish and verified in the prescribed manner under Rule 14 of I.T. Rules 1962 the information called for as per annexure and on the points or matters specified therein on or before 24/12/2019 at 12:15 PM. c) The above mentioned evidence/information is to be furnished online, electronically in 'E-Proceeding facility through your account in 'e-filing website of Income Tax Department d) Para(s) (a) to (c) are applicable if you have an account in e-filing website of Income Tax Department. Till such an account is created by you, assessment proceedings shall be carried out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich it shall be presumed that you have nothing further to state in the said matter." 48. Such notice is admittedly issued at 10:03 PM on 23.12.2019 (Annexure-R/1 page 176 to 178). 49. Thereafter it is also apparent that 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. 50. In such circumstances, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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