Cwp/13613/2016 Of M/S Shri Vishnu Eatables (India) Ltd v. Deputy Commissioner Of Income Tax, Central Circle And Ors

IN THE, HIGH COURT OF PUNJAB & HARYANA ATCHANDIGARH Civil Writ Petition No. 13613 of 2016 (O&M)Date of Decision: 3[rd]October, 2016 M/s Shri Vishnu Eatables (India) Limited. _ Petitioner VeTSUS Deputy Commissioner of Income Tax, Central Circle, Karnal and another ..Respondents CORAM:HON'BLE MR. JUSTICE S.J.VAZIFDAR, CHIEF JUSTICE. HON'BLE MR. JUSTICE DEEPAK SIBAL, JUDGE. Present :Ms. Radhika Suri, Senior Advocate with Ms. Rinku Dahiya, Advocate, for the petitioner. Mr. Rajesh Sethi, Advocate and >Ms. Pridhi Jaswinder Sandhu, Advocate,for the respondents.| AIS F S.J.VAZIFDAR, CHIEF JUSTICE Respondent No.1 is the Assessing Officer and respondent No.2,also a Deputy Commissioner of Income Tax, is the Transfer Pricing Officer(TPO). — 2.|The petitioner seeks a writ of certiorari to quash the referenceby the first respondent to the second respondent-Transfer Pricing Officer(TPO) and the satisfaction recorded by the first respondent for making thereference. The relief was sought on the ground that the provisions ofChapter-X of the Income Tax Act, 1961 (for short ‘the Act’) were notapplicable to the international transactions undertaken by the petitioner asthey were not with its associated enterprises within the meaning of thatexpression in the Act. It is contended, therefore, that the entire proceedings including the reference to the TPO for the assessment year 2011-12 iswithout jurisdiction and void. 3 |By our interim order dated 29.08.2016 we_ recordedMs. Radhika Suri’s statement that the petitioner would only raise legalsubmissions to the effect that before making a reference to the TPO todetermine the arms length price of an international transaction the AssessingOfficer is bound to grant the assessee an opportunity of showing causeagainst it including by a personal hearing, pass a reasoned order on theobjections and serve the same. AIn view of the limited scope of this petition it is necessary toState only those facts which are necessary for deciding the submissions. 5 | Section 92A(1) of the Act reads as under:- Meaning of associated enterprise QIA.(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— (G) 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 of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, 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. 6.The first respondent by a notice dated 19.03.2016 called upon the petitioner to show cause why its cases for the assessment years 2011-12to 2014-15 be not transferred to the TPO. The notice granted the petitioner ahearing. The notice referred to the earlier questionnaire issued by theDepartment in connection with the assessment proceedings under sections153A, 153C and 142(1) of the Act and stated that during the course of asurvey of the petitioner’s premises various documents were found and impounded. The notice further stated that the petitioner had made sales to itsgroup companies M/s Haryana Trading Company, Dubai managed by oneKushal Mittal and M/s Indian Treat Pvt. Ltd. Singapore managed by oneSunny Mittal; that the sales to the sister concern were under invoiced with aview to evading tax and that profits from India were diverted to tax havenswhich were remitted back to India for investing in properties by said KushalMittal and his family members. The notice further stated that theAccountant’s report under section 92E in Form No. 3CEB was not furnishedby the petitioner. © impounded. The notice further stated that the petitioner had made sales to itsgroup companies M/s Haryana Trading Company, Dubai managed by oneKushal Mittal and M/s Indian Treat Pvt. Ltd. Singapore managed by oneSunny Mittal; that the sales to the sister concern were under invoiced with aview to evading tax and that profits from India were diverted to tax havenswhich were remitted back to India for investing in properties by said KushalMittal and his family members. The notice further stated that theAccountant’s report under section 92E in Form No. 3CEB was not furnishedby the petitioner. © 7 |The petitioner by its letter dated 21.03.2016 filed its objections.The petitioner denied that it had under invoiced its exports. The petitioneralso alleged that the remittances of said Kushal Mittal were in the normalcourse of business and were personal transactions with one Adarsh Kumarand M/s Vashudev Trading Company and that said Kushal Mittal was notdirectly or indirectly related to either the said Adarsh Kumar or |M/s Vashudev ‘Trading Company. Adarsh Kumar and M/s VashudevTrading Company were shown in the bank statements tabulated in the showcause notice. It was further stated that neither M/s Haryana TradingCompany, Dubai nor M/s Indian Treat Pvt. Ltd. Singapore were thepetitioner’s associate enterprises; that the petitioner was not required tosubmit the accountant’s report under section 92E and that its case was notliable to be referred to the TPO. | 8A show cause notice dated 22.03.2016 in continuance of the'earlier letters including the show cause notice dated 19.03.2016 was issuedin respect of the assessment years 2008-09 to 2010-11 calling upon the petitioner to show cause why its cases for the said years be not also referred ~to the TPO. 9 |By a letter dated 05.04.2016 respondent No.2. 1.e. the TPO.informed the petitioner that he had received a reference under section92CA(1) of the Act from respondent No.1 to determine under section92CA(3)thearm’s.lengthprice1n|respectofinternationaltransactions/specified domestic transaction entered into by the petitionerduring the financial year 2010-11 corresponding to the assessment year2011-12. The petitioner was called upon to produce the evidence and/ormaterial relied upon by it in support of its computation of the arm’s lengthprice of the said transactions as well as various other documents includingform No.3CFBB and information and documents maintained under section92D(1) read with rules 1O0D(1) and (3) of the Income Tax Rules, 1962alongwith a copy of the transfer pricing study report. 10.By a letter dated 30.04.2016 the petitioner contended that therewas no international transaction or specified domestic transactionundertaken by it during the assessment years 2008-09 to 2014-15 with anassociate enterprise and accordingly it was not required to submit the FormNo.3CEB. The letter further stated that a copy of the reference had not beensupplied to the petitioner. The petitioner by its Chartered Accountant’s letter dated27.05.2016 addressed to the TPO, which was in continuation of the earlierletter dated 30.04.2016 referred to its objections to the show cause notice, ©the contentions raised therein and requested for a copy of the reference bythe first respondent to him and a personal hearing. — 10.By a letter dated 30.04.2016 the petitioner contended that therewas no international transaction or specified domestic transactionundertaken by it during the assessment years 2008-09 to 2014-15 with anassociate enterprise and accordingly it was not required to submit the FormNo.3CEB. The letter further stated that a copy of the reference had not beensupplied to the petitioner. The petitioner by its Chartered Accountant’s letter dated27.05.2016 addressed to the TPO, which was in continuation of the earlierletter dated 30.04.2016 referred to its objections to the show cause notice, ©the contentions raised therein and requested for a copy of the reference bythe first respondent to him and a personal hearing. — 11.Respondent No.1 under the cover of a letter dated 06.05.2016.forwarded the reasons/satistaction recorded by him before referring thematterTOtheTPO.Thereasons/satisfactionnote1S.titled;FReasons/Satisfaction note for transfer the case of M/s Shri Vishnu Eatables(India) Ltd. PAN: to Transfer Pricing Officer, New Delhi”.The satisfaction note referred to the search and seizure operation undersection 132 of the Act carried out at the petitioner’s premises and theincriminating documents found and seized during the search. Thesatistaction note further records as follows.|=2°23 crores were surrendered.However, complete taxes on the said undisclosed income had not been paid.The petitioner and its group were not cooperating in the assessmentproceedings. The petitioner had under invoiced its sales to its said groupcompanies/sister concerns with a view to evading tax. A comparative charttabulating the export sales to the sister concerns were set out. Profit fromIndia was diverted to tax heavens which were then remitted back to India forinvesting in properties by Kushal Mittal and his family members. Their bankdetails were also tabulated. The details tabulated showed that the petitionerexported its products to its related concerns but that the petitioner had failedto tile the accountant’s report under section 92 in Form-3CEB alongwith itsreturn of income. The petitioner and the said companies “are familymembers”. The said Kushal Mittal, who managed the Haryana TradingCompany, Dubai is the son of Vishnu Bhagwan Mittal, a key person as wellas the Managing Director/promoter of the petitioner. The sales by thepetitioner to the sister concern were at very low rates and the sister concernin turn sold the same at much higher rates and the income generated therebyfound its way back to India and was invested in properties by the members of the group. Instruction No.3/2016 dated 10.03.2016 issued by the CentralBoard of Direct Taxes was held applicable. The circular containsinstructions for reference to the TPO jinter-alia where search and seizure orsurvey operations had been carried out and findings regarding transferpricing issues have been recorded by the Assessing Officer. ©12.The first respondent has submitted a satisfaction note withadequate particulars and reasons. The correctness of what is stated therein isa different matter. The challenge to the decision to refer the transactions tothe TPO on the ground that there are no international transactions must betaken in the proceedings and before the authorities under the Act. It is not afit case to entertain them in a writ petition under Article 226 of theConstitution of India. | of the group. Instruction No.3/2016 dated 10.03.2016 issued by the CentralBoard of Direct Taxes was held applicable. The circular containsinstructions for reference to the TPO jinter-alia where search and seizure orsurvey operations had been carried out and findings regarding transferpricing issues have been recorded by the Assessing Officer. ©12.The first respondent has submitted a satisfaction note withadequate particulars and reasons. The correctness of what is stated therein isa different matter. The challenge to the decision to refer the transactions tothe TPO on the ground that there are no international transactions must betaken in the proceedings and before the authorities under the Act. It is not afit case to entertain them in a writ petition under Article 226 of theConstitution of India. | 13.Respondent No.1 by his letter dated 23.03.2016 addressed tothe Principal, Commissioner of Income Tax, set out all that he had recordedin the satisfaction note as well as the petitioner’s reply/objections to thesame. He also dealt with the petitioner’s contention that the Dubai andSingapore Companies were not its associate enterprises. He referred to theprovisions of law. Based on the same, he stated that the provisions of section92A were applicable to the case and that he was satisfied that the petitioner’scase required a reference to the Transfer Pricing Officer for thedetermination of the arm’s length price of the transactions. He sought theapproval of the Principal, Commissioner of Income Tax for the same inrespect of the assessment years 2008-09 to 2014-15. The Principal,Commissioner of Income Tax by his letter dated 28/29.03.2016 gave thenecessary permission. 14. Ms. Suri’s submissions are as tollow:-. I)In terms of the instructions given by the CBDT circular dated10.03.2016, the requirement of passing a reasoned order on theobjections regarding whether a transaction is an internationaltransaction or not and the service of the order upon the assesseeis a condition precedent to the Assessing Officer making areference to the Transfer Pricing Officer. © IT)Non-compliance with either or both the above mandatoryconditions render the reference to the Transfer Pricing OfficerVOIC. 15.While the first submission is well founded, the second is not. 16.In support of the first submission Ms. Suri relied upon a judgment of the Bombay High Court inVodafone India Service Pvt. Ltd. v.Union of India and others [2014] 361 ITR 531 (Bombay)where it is held:- “OO. We have mentioned herein above that it is necessary|for the Assessing Officer to decide the issue of objection to.applicability of chapter X, if raised by the assessee, beforereferring the transaction to the TPO as it is a basic issue.and would prevent loss of man hours on both sides in|computing the ALP if it is finally concluded that Chapter|X is not applicable. We are of the view that this exercise|could also be done by the Assessing officer before he.determines the ALP in exercise of his powers under|section 92C(3). It was Mr. Nani Palkhiwala who in the|concluding paragraph of his Preface to the eighth edition|of his monumental work “The Law and Practice of IncomeTax” observed:- “Every Government has a right to levy taxes.But no Government has the right, in theprocess of extracting tax, to cause misery andharassment to the taxpayer and the gnawingfeeling that he is made the victim ofpalpableinjustice The revenue would do well to keep the above stage|advice in mind while dealing with the assessee. We are|constrained to observe that in this case it would be|natural for the petitioner to feel harassed as the|Assessing Officer did not give any opportunity of hearing|before making a reference to the TPO and none of the twoauthorities viz. the TPO and the Assessing Officer dealt|with its preliminary objection. The TPO does not deal with “Every Government has a right to levy taxes.But no Government has the right, in theprocess of extracting tax, to cause misery andharassment to the taxpayer and the gnawingfeeling that he is made the victim ofpalpableinjustice The revenue would do well to keep the above stage|advice in mind while dealing with the assessee. We are|constrained to observe that in this case it would be|natural for the petitioner to feel harassed as the|Assessing Officer did not give any opportunity of hearing|before making a reference to the TPO and none of the twoauthorities viz. the TPO and the Assessing Officer dealt|with its preliminary objection. The TPO does not deal with the petitioner's objection about applicability of Chapter X,on the ground that it would be dealt with by the|Assessing officer. Thereafter when the petitioner raises|the same issue before the Assessing Officer he does not|deal with the same on the ground that he is bound to|complete the assessment in terms of the ALP determined|by the TPO. We hope the revenue will be more sensitive tothe just demands of the assessee and not treat the|assessee as an adversary who has to be taxed, no matter|what.” 1/7.We are in respectful agreement with the view that it isnecessary for the Assessing Officer to decide the objections, if any, to theapplicability of Chapter-X before referring the transactions to the TPO asalso before determining the arm’s length price himself. To the reasonsfurnished by the Bombay High Court for this view we venture to add reasonsof our own. 18.In another case ot Vodafone India Service Pvt. Ltd. v. Union ofIndia and others [2013] 359 ITR 133 (Bombay)qa Division Bench of theBombay High Court (to which one of us S.J.Vazifdar, J. was a party) heldthat where a reference is made under section 92CA(1), the ‘Transfer PricingOfficer must determine the arm’s length price of the transaction and in doingso he would not be entitled to consider the question as to whether thetransaction referred to him is an international transaction or not. It was held:- “65. The Advocate General submitted that the AO is not|bound by the TPO's order in any respect and is entitled to.decide the questions determined by the TPO on his own.Mr. Salve, on the other hand, rightly submitted that the|AO is not entitled to revisit or to even question any part ofthe order of the TPO determining the arm's length price,including the question whether the transaction is an|international transaction or not. 66. The AO has jurisdiction to consider any international|transaction and to determine the arm's length price|thereof. This is clear from sections 92C and 9O2CA. TheAO has the power to tax all income under section 4 of theAct. He has the power to determine whether a transaction1S an international transaction and to determine the arm'slength price thereof under section 92C(1) and (3). He is|not bound to refer the computation of the arm's length|price in relation to an international transaction under| section 92ZCA(1) to the TPO. He may determine thesequestions himself. Where the AO determines the arm's|length price of an international transaction himself and|proceeds to complete the assessment without the.intervention of the TPO, either on a reference under|section 92CA(1) or suo moto under sub-sections (2A) and|(2B) of section 92CA, no complications arise. The exercise of power by the AO on the one hand)and the TPO under sections 92C and QO2CA on the otherare a different matter and of considerable general|importance. section 92ZCA(1) to the TPO. He may determine thesequestions himself. Where the AO determines the arm's|length price of an international transaction himself and|proceeds to complete the assessment without the.intervention of the TPO, either on a reference under|section 92CA(1) or suo moto under sub-sections (2A) and|(2B) of section 92CA, no complications arise. The exercise of power by the AO on the one hand)and the TPO under sections 92C and QO2CA on the otherare a different matter and of considerable general|importance. 67. The AO may, in exercise of his discretion under|section 92CA and with the previous approval of the.Commissioner, refer the computation of the arm's length|price in relation to an international transaction under|section 92C to the TPO. In such a case, the TPO would bebound to determine the arm's length price in respect ofthe said transaction. In doing so, the TPO would not be|entitled to reconsider the question as to whether the.transaction is an international transaction or not. In alreference under section 92ZCA(1), this question isdetermined by the AO as well as the Commissioner. That|under section 92CA(1) the Commissioner must accord hisapproval to the AO's decision to refer the computation ofthearm'slengthprice TOtheTPOpositstheCommissioner havingsatistiedhimself.thatthetransaction is an international transaction. The remedy otthe assessee to question the TPO's decision would be|before the Commissioner of Income-tax or the Dispute.Resolution Panel as we will shortly indicate and thereafterbefore the ITAT. The provisions of the Act do not indicate|that the Legislature intended conferring upon the TPO thejurisdiction to effectively sit in appeal over the decision|not merely of the AO, but of the Commissioner as well. The explanation to section 92CA provides that for)the purpose of section 92CA, the TPO means a Joint|Commissioner or Deputy Commissioner or Assistant|Commissioner authorized by the Board to perform the|functions of an Assessing Officer specified in section 92C.and 92D in respect of any person or class of persons.These officers are junior to a Commissioner who exercisesappellate authority. The Legislature has not conferred.upon a Joint Commissioner or Deputy Commissioner or Assistant Commissioner, the power to sit in appeal over a|decision of a Commissioner. In this regard, we are in respectful agreement with|the judgment of a Division Bench of the Gujarat High)Court in.Veer GemsVi.Assistant Commissioner of IncomeTax(2012) 246 CTR (Guj.) 392. 68. Thus, where a reference is made under section 92CA.(1), the TPO must determine the arm's length price of thetransaction and in doing so, he would not be entitled to consider the question as to whether the transaction|reterred to him is an international transaction or not.” In this regard, we are in respectful agreement with|the judgment of a Division Bench of the Gujarat High)Court in.Veer GemsVi.Assistant Commissioner of IncomeTax(2012) 246 CTR (Guj.) 392. 68. Thus, where a reference is made under section 92CA.(1), the TPO must determine the arm's length price of thetransaction and in doing so, he would not be entitled to consider the question as to whether the transaction|reterred to him is an international transaction or not.” 19.In a case where the Assessing Officer himself determines thearm’s length price, the assessee would be entitled to place his case beforehim including regarding the question as to whether the transactions areinternational transactions or not. If the assessee does not accept theAssessing Officer’s determination of these issues, he would be entitled tochallenge the same before the Commissioner of Income Tax (Appeals) andthereafter before the Income Tax Appellate Tribunal. Both the appellateauthorities would have the benefit of the case of the Revenue and of the!assessee. However, if the Assessing Officer decides to refer thedetermination of the arm’s length price to the TPO without affording theassessee an opportunity of being heard and without deciding the objections,as to whether the transaction is an international transaction or not, the)assessee would be severely prejudiced for it would then not have had anopportunity of having this objection even considered once the reference ismade under section 92A(1) the Transfer Pricing Officer cannot for reasonsStated in the second Vodafone’s judgment[2013] 359 ITR 133 (supra)consider the question as to whether the transaction referred to him is aninternational transaction or not. This in turn would affect the assessmentproceedings itself for the Assessing Officer would also be deprived theopportunity of arriving at a informed decision as to whether the transactionthat he prima-facie considered to be an international transaction is or is notinfact an international transaction. The first opportunity that the assesseewould in such a case have to raise a contention that the transaction is not an/international transaction would be before the Disputes Resolution Panel(DRP) or the CIT(A) as the case may be. These are in effect appellateproceedings where the appellate or the higher authority CIT(A)/DRP would have to consider the issue with the benefit of the case of the department aswell as of the assessee for the first time. Indeed even the Revenue wouldcome to know of the assessee’s objections and the material in supportthereof for the first time. This may in a given case result in the CIT(A) or theITAT remanding the matter resulting in multiplicity of proceedings. Theymay of course decide the issue themselves and indeed that would always bepreferable than an order of removal. The DRP ofcourse must decide theissue itself. The DRP has ample powers under section 144C(5)(6) and (7) toconsider all aspects and even further material. have to consider the issue with the benefit of the case of the department aswell as of the assessee for the first time. Indeed even the Revenue wouldcome to know of the assessee’s objections and the material in supportthereof for the first time. This may in a given case result in the CIT(A) or theITAT remanding the matter resulting in multiplicity of proceedings. Theymay of course decide the issue themselves and indeed that would always bepreferable than an order of removal. The DRP ofcourse must decide theissue itself. The DRP has ample powers under section 144C(5)(6) and (7) toconsider all aspects and even further material. 2().Further in respect of international transactions, an assessee mustmaintain certain information. Section 92D provides that every person whohas entered into an international transaction or specified domestictransaction shall keep and maintain such information and document inrespect thereof, aS may be prescribed. Rule 10D of the Rules stipulates theinformation and documents to be kept by the assessee in respect of aninternational transaction or a specified domestic transaction. There is adetailed description of such information and documents in clauses (a) to (m)of sub-rule (1) of Rule 10D. This information is to be kept and maintainedfor a period of eight years from the end of the relevant assessment year.Section 92E requires that every person who has entered into an internationaltransaction or specified domestic transaction during a previous year shallobtain a report from an accountant and furnish such report on or before thespecified date in the prescribed form duly signed and verified in theprescribed manner by such accountant and setting forth such particulars asmay be prescribed. Rule 10E in turns provides that the report from the accountant required to be furnished under section 92F shall be in Form-3CEB. 21.The failure to furish the information invites penalconsequences under section 271G of the Act. An assessee who fails tofurnish the information or documents as required by section 92D(3) may bedirected by the Assessing Officer or the Commissioner (Appeals) to pay byway Of penalty a sum equal to two percent of the value of the internationaltransaction or specified domestic transaction for each such failure.22.It is evident, therefore, that the decision as to whether atransaction is an international transaction or not has far reachingconsequences upon the assessee. An assessee is substantially affected by thefinding as to whether or not a transaction entered into by it is aninternational transaction. It is only fair then that an assessee is given anopportunity of being heard on the question as to whether a transactionentered into by it is an international transaction or not.23.It does occur to us that it could be said that the opportunity ofraising objections and being heard on this issue ought to be granted by thePrincipal, Commissioner of Income Tax (Pr.CIT) for it is the Pr.cCIT whoultimately grants or refuses the approval to refer the transaction to theTransfer Pricing Officer for determination of the arm’s length price.However, if an assessee is given such an opportunity before the AssessingOfficer, that would be sufficient. The Assessing Officer would undoubtedlyhave to forward the same alongwith the objections, if any, to the Pr.CITwhile seeking his approval to refer the transaction to the Transfer PricingOfficer. Ultimately the assessee has the opportunity of challenging the samein appeal. | 24.Ms. Suri also relied upon a circular issued by the Central Boardof Direct Taxes dated 10.03.2016 containing guidelines for implementationof the Transfer Pricing Provisions. The same is applicable to bothinternational transactions and specified domestic transactions betweenassociate enterprises. Ms. Suri relied upon the following provisions in thecircular:-. OQ.Reference to Transfer Pricing Officer (TPO) 24.Ms. Suri also relied upon a circular issued by the Central Boardof Direct Taxes dated 10.03.2016 containing guidelines for implementationof the Transfer Pricing Provisions. The same is applicable to bothinternational transactions and specified domestic transactions betweenassociate enterprises. Ms. Suri relied upon the following provisions in thecircular:-. OQ.Reference to Transfer Pricing Officer (TPO) 3.1 The power to determine the Arm’s Length Price (ALP)in an international transaction or specified domestic.transaction is contained in sub-section (3) of Section 92C.However, Section 92CA provides that where the Assessing|Officer (AO) considers it necessary or expedient so to do,he may refer the computation of ALP in relation to an|internationaltransactionOT|specifieddomestictransaction to the TPO. For proper administration of the.Income-tax Act, the Board has decided that the AO shall|henceforth make a reference to the TPO only under the|circumstances laid out in this Instruction. 3.2 XX XX XX XK XX 3.3 Cases selected for scrutiny on non-transfer pricing|risk|parameters.but|also.havinginternationaltransactions or specified domestic transactions,|shall bereferred to TPOs only in the following circumstances1(a) where the AO comes to know that the taxpayer has|entered into international transactions or _ specifiedomestic 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 theAccountant’s report filed; (b) where there has been a transfer pricing adjustment ofRs. 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 Income2TaxAct and findings regarding transfer pricing issues inrespect of international transactions or specified domestictransactions or both have been recorded by _theInvestigation 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 respectof 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 ofthe ALP of an international transaction or specified|domestic transaction before seeking approval of the PCIT|or CIT to reter the matter to the TPO for determination otthe ALP: where the taxpayer has not filed the AccountantASs reporunder Section QOZE of the Act but the internationatransactionsOT|specifieddomestic transactionsundertaken by it come to the notice of the AO9 e where the taxpayer has not declared one or more|internationaltransactionOT|specifieddomestictransaction in the Accountant’s report filed under SectionODOR of the Act and the said transaction or transactionscome 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 thesaid transactions are not international transactions or specified domestic transactions or they do not impact the|income of the taxpayer. where the taxpayer has not filed the AccountantASs reporunder Section QOZE of the Act but the internationatransactionsOT|specifieddomestic transactionsundertaken by it come to the notice of the AO9 e where the taxpayer has not declared one or more|internationaltransactionOT|specifieddomestictransaction in the Accountant’s report filed under SectionODOR of the Act and the said transaction or transactionscome 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 thesaid transactions are not international transactions or specified domestic transactions or they do not impact the|income of the taxpayer. In the above three situations, the AO must provide an.opportunity of being heard to the taxpayer before|recording his satisfaction or otherwise. In case no|objection is raised by the taxpayer to the applicability ofChapter X |Sections 92 to 92F| of the Act to these three|situations, then AO should refer the internationaltransaction or specified domestic transaction to the TPO.for determining the ALP after obtaining the approval of|the PCIT or CIT. However, where the applicability of|Chapter X [Sections 92 to 92F] to these three situations is objected to by the taxpayer, the AO must consider the,taxpayer's objectionsand pass a speaking order so as tocomply with the principles of natural justiceIf the AO|decides in the said order that the transaction in questionneeds to be referred to the TPO, he should make a.reference after obtaining the approval of the PCIT or CIT”.(emphasis supplied). 25.Admittedly, in the present case there was a search andseizure operation at the petitioner’s premises and it is the respondent(s)case that the petitioner has not filed the accountant’s report under section92E. The petitioner’s case, therefore, falls within paragraph 3.3 (c) andthe first sub-paragraph after the opening part of paragraph 3.4, both ofwhich have been emphasized by us. 26.Mr. Sethi’s contention that in cases falling under paragraph 3.3(c) it is not necessary for the Assessing Officer to pass aRAVINDER SHARMA2016.10.05 11:39I attest to the accuracy andauthenticity of this document speaking/reasoned order is not well founded. Paragraph 3.3(c) cannot beread in isolation. It must be read with paragraph 3.4. The opening part ofparagraph 3.4 deals with cases to be referred by the Assessing Officer tothe TPO in accordance with paragraphs 3.2 and 3.3 in respect oftransactions having the “following situations” meaning thereby the threesituations immediately following and identified by the marks ‘ee 2/.The circular further provides that in such cases theAssessing Officer must “record his satisfaction”. ‘The words used are“record his satisfaction” which indicate firstly that the Assessing Officermust reduce his satisfaction in writing and secondly he must furnishreasons for the same. That the satisfaction is to be in writing is clear fromthe word “record”. Moreover paragraph 3.3 expressly states that theAssessing Officer “must .....paSs a Speaking order..... 28.We have, however, already held that the satisfactionrecorded by the Assessing Officer in the present case contains sufficientreasons. He has indicated the relationship between the assessee and theother parties. He has made a comparative chart and alleged that the saleswere under invoiced. [That is sufficient to refer the matter to the TPO.Whether the allegations are true or not must be tested before theauthorities under the Act and not in a Writ Petition under Article 226. —The challenge on this ground is, therefore, unsustainable. | 29.This brings us to Ms. Suri’s second submission, namely, thatthe order recording satisfaction upon which the Principal, Commissionerof Income Tax, grants permission, must be served upon the assessee. Weagree. The purpose of this exercise of granting the assessee anOpportunity of raising objections and being heard and the requirement of 29.This brings us to Ms. Suri’s second submission, namely, thatthe order recording satisfaction upon which the Principal, Commissionerof Income Tax, grants permission, must be served upon the assessee. Weagree. The purpose of this exercise of granting the assessee anOpportunity of raising objections and being heard and the requirement of the Assessing Officer to furnish reasons for the satisfaction for thereference of the transaction to the TPO for determination of the arm’slength price is inter-alia to enable the assessee firstly to meet the case andrepresent against it to the TPO before the Assessing Officer on theground that there is no international transaction and secondly in the eventof his objections being overruled, an opportunity of challenging the samebefore the Disputes Resolution Panel or the Commissioner of IncomeTax(Appeals) as the case may be, and thereafter before the Income TaxAppellate Tribunal. © 30).The matter, however, does not end here for the respondentshave complied with all these requirements. The respondents haveproduced the satisfaction without the Pr.CIT approval for the reference.Ms. Suri, however, contends that the satisfaction that was recorded by thefirst respondent has not been served upon the assessee. She submits thatwhere the satisfaction is not served upon the assessee before a referenceto the TPO by the Assessing Officer, the reference is void andconsequently all the proceedings before the Transfer Pricing Officer areVOI. 31.The submission is not well founded. As we noted earlier, thepurpose of this entire exercise is inter-alia to afford the assessee anopportunity of establishing at the threshold that the transaction is not aninternational transaction. If his objections are overruled it is open for himto challenge the same before the Commissioner of Income Tax (Appeals)or the Disputes Resolution Panel, as the case may be. An assessee is notentitled as a matter of right to invoke the writ jurisdiction at the stage ofreference by the Assessing Officer to the TPO. His grievances can be raised in a Challenge to the draft assessment order before the DisputesResolution Panel or the final assessment order before to theCommissioner of Income Tax (Appeals). The requirements of the rules ofnatural justice and of the said circular dated 10.03.2016 would have beenmet even if the satisfaction note is furnished subsequently. As we notedearlier, in any event the assessee cannot raise the question as to whetheror not the referred transaction is an international transaction before theTranster Pricing Officer. It is, therefore, sufficient if he is served with theorder subsequently even alongwith the draft assessment order or theassessment order as the case may be. | 3).The answer to Ms. Suri’s question as to what if thesatisfaction note is not furnished at all is obvious. The assessee canalways apply for the same either before the authorities and failing whichby filing a writ petition. — 33.The contention that the reference is voidab initioon accountof the satisfaction note not having been furnished to the assessee beforethe reference of the transaction by the Assessing Officer to the TPO is,therefore, rejected. The failure to supply the satisfaction note before thereference to the IPO is at the highest a mere irregularity and does notprejudice the assessee in any manner whatsoever. 34.It we were to accept this contention, it would lead to theStartling result of the entire assessment proceedings being annulled onaccount thereof. There is nothing in the Act or in the circular thatWalrants such an interpretation. The view that we have taken does notprejudice the assessee in any manner whatsoever. 33.The contention that the reference is voidab initioon accountof the satisfaction note not having been furnished to the assessee beforethe reference of the transaction by the Assessing Officer to the TPO is,therefore, rejected. The failure to supply the satisfaction note before thereference to the IPO is at the highest a mere irregularity and does notprejudice the assessee in any manner whatsoever. 34.It we were to accept this contention, it would lead to theStartling result of the entire assessment proceedings being annulled onaccount thereof. There is nothing in the Act or in the circular thatWalrants such an interpretation. The view that we have taken does notprejudice the assessee in any manner whatsoever. 35.In view of the above findings we are inclined to dismiss thewrit petition. In view of the fact that the reference to the TPO has alreadybeen made after obtaining the approval of the Pr.CIT the objection raisedby the petitioner may be taken before the DRP or the CIT(A) as the casemay be. It is necessary, however, now to consider the nature of the orderto be passed. As the provisions of the Act and of the circular have notbeen complied with strictly and the matter already stands referred to theTPO it is necessary to protect the petitioner in certain aspects. Normallythe petitioner would have had an opportunity of contending that thetransactions are not international transactions as they are not with itsassociated enterprises before the Assessing Officer himself. That stagehaving passed, it is only fair that if the petitioner chooses the DRP routeor the CIT(A) route, the DRP or the CIT(A) as the case may be ought tofirst adjudicate the question as to whether the said transactions areinternational transactions or not. If they come to the conclusion that theyare not international transactions, certain consequences may followwhich we keep open for the petitioner to take before the DRP or theCIT(A) as the case may be. We clarify that in the event of the CIT(A) orthe DRP coming to the conclusion that they are international! transactions,it would not be necessary for them to stall the proceedings and they mayproceed to decide them finally. To this extent, our order is at a variancewith the directions issued by the Bombay High Court in|Vodafone IndiaService Pvt. Ltd. v. Union of India and others [2014] 361 ITR 531(Bombay) which are as follow:- “03. In the above circumstances, we dispose of the|present petition with the following directions:-(A) to (C) Xx XX XX XX XX XX (D) We further make it clear that in case the decision of|the DRP on the above preliminary issue is adverse to the|petitioner, it would be open to the petitioner to challenge|the order of the DRP on the preliminary issue in a writ|petition if a case is made out at that stage that the|decision of the DRP is patently illegal, notwithstanding|the availability of alternative remedy of filing an appeal|betore the Income Tax Appellate Tribunal.” We see no reason for these authorities to stall theproceedings if they come to the conclusion that the transactions areinternational transactions. | 36.The penalty proceedings under section 271(G) have beeninitiated on the basis that the provisions of Chapter-X and in particularSections 92D and 92E have not been complied with. As we noted earlierthe petitioner did not have an opportunity of representing its case to theeffect that these transactions are not international transactions. It is onlyfair then that while the penalty proceedings may continue the orderimposing penalty, if any, shall not be implemented till the decision of theDRP or the CIT(A) as the case may be on the preliminary issue as towhether it 1S an international transaction or not. — 3/7.In the circumstances the writ petition is dismissed subject towhat is stated in the above paragraphs. 03.10.2016 |‘ravinder’ (S.JI.VAZIFDAR)CHIEF JUSTICE (DEEPAK SIBAL)JUDGE Whether speaking/reasoned √Yes/No Whether reportable √ Yes/No