Hitachi Hi Rel Power Electronics Pvt. Ltd v. The Deputy Commissioner Of Income Tax Circle 2(1)(1),Ahmedabad

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/SPECIAL CIVIL APPLICATION NO. 23302 of 2019 With CIVIL APPLICATION (FOR VACATING INTERIM RELIEF) NO. 1 of 2020 In R/SPECIAL CIVIL APPLICATION NO. 23302 of 2019 FOR APPROVAL AND SIGNATURE: HONOURABLE MR. JUSTICE J.B.PARDIWALA andHONOURABLE MR. JUSTICE ILESH J. VORA ========================================================== 1Whether Reporters of Local Papers may be allowed toNOsee the judgment ?2To be referred to the Reporter or not ?YES3Whether their Lordships wish to see the fair copy ofNOthe judgment ?4Whether this case involves a substantial question ofNOlaw as to the interpretation of the Constitution of Indiaor any order made thereunder ? ==========================================================HITACHI HI REL POWER ELECTRONICS PVT. LTD. Versus THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 2(1)(1),AHMEDABAD ==========================================================Appearance:MR B S SOPARKAR(6851) for the Petitioner(s) No. 1MR MR BHATT SENIOR COUNSEL WITH MRS MAUNA M BHATT(174) for the Respondent(s) No. 1,2 ========================================================== CORAM: HONOURABLE MR. JUSTICE J.B.PARDIWALAand HONOURABLE MR. JUSTICE ILESH J. VORA Date : 19/08/2021 ORAL JUDGMENT (PER : HONOURABLE MR. JUSTICE J.B.PARDIWALA) 1 By this writ application under Article 226 of the Constitution ofIndia, the writ applicant has prayed for the following reliefs: “(a) quash and set aside the impugned reference by Respondent No.1 toRespondent No.2 and the notice dated 20.12.2019 at Annexure ‘A’ tothis petition. (b) pending the admission, hearing and final disposal of this petition, tostay implementation and operation of the impugned notice dated20.12.2019 at Annexure ‘A’ to this petition and stay the assessmentproceedings for AY 2017-18 undertaken by Respondent No.1; (c) any other and further relief deemed just and proper be granted inthe interest of justice; (d) to provide for the cost of this petition” 2The case put up by the writ applicant, in his writ application, maybe summarized as under: 3 The writ applicant is a limited company. It seeks to challenge thereference made by the respondent No.1 to the respondent No.2 underSection 92CA (1) of the Income Tax Act (for short, “the Act”), in relationto the computation of Arm’s Length Price on the ground of beingerroneous, illegal and contrary to law. The writ applicant further seeks tochallenge the notice under Sections 92CA(2) and 92D(3) respectivelyissued by the respondent No.2 dated 20[th] December 2019, on the groundof being erroneous, illegal, contrary to law and without jurisdiction. 4The writ applicant is engaged in the business of manufacturingIndustrial Automation Solution, Rotating Machine Control, PowerController, Uninterrupted Power Supply and Power Conditioning products. In relation to A.Y. 2017-18, the writ applicant had availed anunsecured External Commercial Borrowing (ECB) rupee loan from theHitachi International Treasury Limited, Singapore, for the purpose ofworking capital. This loan carries an interest at the rate of 7.19% perannum. The writ applicant filed Form 3CEB, wherein there is arequirement in clause 14 to make a disclosure about the loan orborrowing of money and the amount paid / received in the transaction. 5In the aforesaid context, it is the case of the writ applicant that ithad appropriately disclosed the transaction in the Form 3CEB. 6The respondent No.1 issued a show cause notice dated 18[th]November 2019 under Section 142(1), which reads thus: products. In relation to A.Y. 2017-18, the writ applicant had availed anunsecured External Commercial Borrowing (ECB) rupee loan from theHitachi International Treasury Limited, Singapore, for the purpose ofworking capital. This loan carries an interest at the rate of 7.19% perannum. The writ applicant filed Form 3CEB, wherein there is arequirement in clause 14 to make a disclosure about the loan orborrowing of money and the amount paid / received in the transaction. 5In the aforesaid context, it is the case of the writ applicant that ithad appropriately disclosed the transaction in the Form 3CEB. 6The respondent No.1 issued a show cause notice dated 18[th]November 2019 under Section 142(1), which reads thus: “1.During the previous year, assessee company has taken loan fromHitachi International Treasury limited to the tune of Rs. 20 Crores @7.19% interest. Further same was required to be reported in 3CEB butassessee has failed to do so. Therefore you are requested to show causeas to why penalty u/s 271AA of the Act should not be initiated in yourcase. In addition to that you are request to show cause as to why yourcase is not referred to TPO for determination of arm's length on suchunreported transaction. 2. On verification of the details submitted by you, it is noticed thatcertain Creditors are found ideal since last three years and notransactions or payment is being made. Accordingly you are requestedto show cause as to addition of u/s 41 of the act should not be made onaccount of cession of liability. 3. Please explain the Reason for lower deduction of TDS onpayment made u/s 194(C) of the Act. 4. On perusal of reply filed by you, it is noticed that you have notfurnished the reply to point 25 in prescribed format. Please resubmitthe same. 5.On verification of ITR and computation of income, it is noticedthat you have Claimed “Any other amount to be allowable as deduction”i.e. bad debt provision utilization of Rs. 2,23,09,526/-. Please show cause as why such deduction should not be disallowed as it is notdebited to P&L account during the previous year. 6.On verification of computation of income it is noticed that youhave claimed reversal of mark to market loss of Rs. 4,73,706/-. In thisregard please provide copy of computation for FY 2015-16 in whichsuch amount was disallowed. 7. During the previous year the company has utilized inventoryprovision of Rs. 97,80,041/-. Explain nature of such claim andsupporting documentary evidences in support of such claim. 8. On perusal of tax audit report is is noticed that In clause 21(a) ofTAR, auditors has reported that amount debited to P & L account beingin the nature of capital, personnel etc. and in relation to amortization oflease hold land amount to Rs.2,27 ,240/-. Further on verification ofcomputation of income it is noticed that the same has not beendisallowed. Therefore, you are requested to show cause as why sameshould not be disallowed. 9.Please submit detailed break up of advances written off ofRs.1,97,076/-. Please show Cause as why to why it should not bedisallowed. 10.On verification of the submission made by you it is noticed thatthere is mismatch in additions to fixed assets as reported in note 12 &13 of the audited financial statement and per clause 18 of tax auditreport. Please reconcile the same. 11. On perusal of clause 18 of the tax audit report, it is noticed thatblock of asset has been increased due to change in rate of exchange.Details of same area as under: a) Building:1,13,32,654/- b) F & F :-3,22,750/- c) Plant & Machinery (15%): 90,74,176/- d) Plant & Machinery (60%): 5,11,555 In this regard, you are requested to provide following: 1. Explain such large amount of details addition due to change inforeign exchange rate difference. b) In audited financial statement value of fixed asset has decreased byRs. 8,10,920/- due to exchange rate difference 10.On verification of the submission made by you it is noticed thatthere is mismatch in additions to fixed assets as reported in note 12 &13 of the audited financial statement and per clause 18 of tax auditreport. Please reconcile the same. 11. On perusal of clause 18 of the tax audit report, it is noticed thatblock of asset has been increased due to change in rate of exchange.Details of same area as under: a) Building:1,13,32,654/- b) F & F :-3,22,750/- c) Plant & Machinery (15%): 90,74,176/- d) Plant & Machinery (60%): 5,11,555 In this regard, you are requested to provide following: 1. Explain such large amount of details addition due to change inforeign exchange rate difference. b) In audited financial statement value of fixed asset has decreased byRs. 8,10,920/- due to exchange rate difference c) Whether foreign exchange rate difference Loss of Rs.2,12,41,135/-debited to P & L account have disallowed or not in computation of totalincome, if such loss Is capital in nature. d) Reason for huge foreign exchange loss in respect of block of building. 12. On verification of submission so made by assessee company andon verification of earlier years records, it is noticed that certainadditions were made on recurring issues. Therefore, you are requestedto show cause as to why similar additions/disallowances should not bemade during the year is line of earlier years.” 7The writ applicant, vide its reply dated 25[th] November 2019, triedto explain to the respondent No.1 that the disclosure in Form 3CEB isappropriate and the same is not defined in any manner. The writapplicant, in its reply, stated that it had disclosed the factum of obtainingloan and the amount of interest paid / payable as well as the methodused to determine the Arm’s Length of the same. The writ applicantfurther clarified in its reply that there is no obligation of reporting the“loan transaction” amount in the Form 3CEB. Only the interest paid onsuch loan transaction will have a bearing on the profit / loss and thesame is required to be reported at clause 14 of the Form 3CEB. 8 It appears that the respondent No.1, vide order passed by himdated 4[th] December 2019, overruled the objections raised by the writapplicant and proceeded to make a reference to the respondent No.2. 9 The respondent No.2 issued impugned notice dated 20[th]December 2019 under Sections 92CA(2) and 92D(3) respectively of theAct. 10 The writ applicant, being aggrieved with the reference made bythe respondent No.1 to the respondent No.2 and also with the notice issued by the respondent No.2 under Section 92CA(2) read with Section92D(3) of the Act, is here before this Court with the present writapplication. SUBMISSIONS ON BEHALF OF THE WRIT APPLICANT: 8 It appears that the respondent No.1, vide order passed by himdated 4[th] December 2019, overruled the objections raised by the writapplicant and proceeded to make a reference to the respondent No.2. 9 The respondent No.2 issued impugned notice dated 20[th]December 2019 under Sections 92CA(2) and 92D(3) respectively of theAct. 10 The writ applicant, being aggrieved with the reference made bythe respondent No.1 to the respondent No.2 and also with the notice issued by the respondent No.2 under Section 92CA(2) read with Section92D(3) of the Act, is here before this Court with the present writapplication. SUBMISSIONS ON BEHALF OF THE WRIT APPLICANT: 11 Mr. B. S. Soparkar, the learned counsel appearing for the writapplicant vehemently submitted that his client was not given anopportunity of hearing by the A.O. before disposing of the objectionsraised by his client and making a reference to the T.P.O. for thedetermination of the A.L.P. Mr. Soparkar submitted that the reference atthe instance of the A.O. to the T.P.O. is solely on the ground that the writapplicant has failed to fully disclose his international transaction of loanof Rs.20 Crore. In other words, the writ applicant has not added the loanamount in column No.8 of the 3CEB report and in such circumstances,the A.O. is seeking to justify the reference made by him to the T.P.O.under para 3.3 (a) of the instruction 3/2016. However, Mr. Soparkarwould vehemently submit that the A.O. has completely overlooked thejurisdictional requirement of a satisfaction in accordance with para 3.4of the instruction 3/2016 that there ought to be an income or a potentialof an income arising and/or being affected on determination of the A.L.P.of an international transaction or specified domestic transaction. Mr.Soparkar would submit that in the absence of such satisfaction beingrecorded as to the income or a potential of an income, the entire exerciseundertaken by the A.O. could be termed as illegal and withoutjurisdiction. Mr. Soparkar would submit that in the case on hand, neitherat the time of issue of show cause notice nor in the order disposing ofthe objections, there is any whisper of income or a potential incomearising and/or being affected on the determination of the A.L.P. of aninternational transaction of the loan of Rs.20 Crore. Mr. Soparkar wouldsubmit that there is no satisfaction on the part of the A.O. that there is any income arising on the determination of the A.L.P. of loan transactionand in such circumstances, it could be said that the A.O. had nojurisdiction to refer the matter to the T.P.O. 12Mr. Soparkar further submitted that the transaction of loan beingon the capital account, there cannot be any impact on income. He wouldargue that the writ applicant has disclosed the transaction of paymentinterest and the same has not been disputed. The transaction of loanseparated from income is on the capital account and has no impact onthe income and therefore, there is no question of computing the A.L.P. ofloan per se. In such circumstances, the very basis of the reference to theT.P.O. is contrary to para 3.4 of the instruction 3/2016 and therefore,illegal. any income arising on the determination of the A.L.P. of loan transactionand in such circumstances, it could be said that the A.O. had nojurisdiction to refer the matter to the T.P.O. 12Mr. Soparkar further submitted that the transaction of loan beingon the capital account, there cannot be any impact on income. He wouldargue that the writ applicant has disclosed the transaction of paymentinterest and the same has not been disputed. The transaction of loanseparated from income is on the capital account and has no impact onthe income and therefore, there is no question of computing the A.L.P. ofloan per se. In such circumstances, the very basis of the reference to theT.P.O. is contrary to para 3.4 of the instruction 3/2016 and therefore,illegal. 13Mr. Soparkar submitted that his client has truly and fully furnishedall the necessary details of payment of interest on loan in the columnNo.14, which has impact on the income. He would argue that as such,there is no clause in the entire Form 3CEB (from clauses 11 to 25),wherein his client is obliged to declare the transaction of loan anddetermine the Arm’s Length Price and therefore, the disclosure made byhis client insofar as the transaction that has an impact on the incomeshould be construed as full and true. Mr. Soparkar would argue that therequirement in para 3.3(a) of the C.B.D.T. circular No.3/2016 should beread with para 3.4 and if read together, the same would indicate thatthere is no failure on the part of his client to disclose any transactionthat has impact on income. He would submit that the case of his clientdoes no fall within the para 3.3(a) of the instruction. 14 In the last, Mr. Soparkar pointed out that the Form 3CEB has twoparts: (i) the part 'A' captures initial information, and part 'B' relates to computation of Arm’s Length Price. It is submitted that the error on thepart of his client in computing the amount in column No.8 would notgive rise to the circumstances of referring the matter to the T.P.O. Hisclient has fully disclosed the factum of loan and interest details incolumn Nos.10 and 14 respectively. The important part of Form 3CEB ispart 'B' only and on that basis, the A.L.P. is determined / changed eitherby the A.O. or T.P.O., as the case may be. As there is no error or omissionin part 'B', it would not have any impact on the A.L.P. to be determinedand therefore, there is no failure on the part of his client to disclose anytransaction that has impact on the income. 15In such circumstances referred to above, Mr. Soparkar prays thatthere being merit in his writ application, the same be allowed and thereference made by the respondent No.1 to the respondent No.2 may bequashed and set aside including the notice dated 20[th] December 2019. 16Mr. Soparkar, in support of his aforesaid submissions, has placedreliance on the following decisions: [1] Indorama Synthetics (India) Ltd vs. Additional Commissionerof Income-tax reported in [2016] 71 taxmann.com 349 (Delhi) [2] Alpha Nipon Innovatives Ltd. vs. Deputy Commissioner ofIncome-tax, Circle 1(1)(1)(1)&1 reported in [2016] 76taxmann.com 166 (Gujarat) [3] Mehsana District Co-operative vs. Deputy Commissioner ofIncome Tax [Special Civil Application No.19073 of 2017 decidedon 6[th] March 2018] SUBMISSIONS ON BEHALF OF THE REVENUE: 16Mr. Soparkar, in support of his aforesaid submissions, has placedreliance on the following decisions: [1] Indorama Synthetics (India) Ltd vs. Additional Commissionerof Income-tax reported in [2016] 71 taxmann.com 349 (Delhi) [2] Alpha Nipon Innovatives Ltd. vs. Deputy Commissioner ofIncome-tax, Circle 1(1)(1)(1)&1 reported in [2016] 76taxmann.com 166 (Gujarat) [3] Mehsana District Co-operative vs. Deputy Commissioner ofIncome Tax [Special Civil Application No.19073 of 2017 decidedon 6[th] March 2018] SUBMISSIONS ON BEHALF OF THE REVENUE: 17Mr. M. R. Bhatt, the learned Senior Counsel assisted by Ms. MaunaBhatt, the learned Senior Standing Counsel appearing for the Revenuehas vehemently opposed the present writ application submitting thatduring the year under consideration, the writ applicant had obtainedloan from the Hitachi International Treasury Limited to the tune of Rs.20Crore at the rate of 7.19% and such transaction was required to bereported in the Form 3CEB. However, Mr. Bhatt would submit that thewrit applicant failed in reporting the transaction of loan in the columnNo.8 of the Form 3CEB. In such circumstances, the A.O., having regardto the C.B.D.T. instruction No.3/2016 was justified in issuing the noticedated 18[th] November 2019 to the writ applicant calling upon the writapplicant to show cause as to why his case should not be referred to theT.P.O. for determination of the Arm’s Length Price on such undisclosedtransaction. 18 Mr. Bhatt would submit that pursuant to the C.B.D.T. instruction,more particularly, para 3.3(a), which provides for making reference tothe T.P.O. in the event of none disclosure of only internationaltransaction in the file of the account report, the objections raised by thewrit applicant were disposed of by a speaking order dated 4th December2019. The A.O., after recording due satisfaction to the effect that theassessee had entered into an international transaction and the same notbeing disclosed in the account report file proceeded to obtain thenecessary approval of the Principal Commissioner of Income Tax – 2,Ahmedabad and refer the matter to the Transfer Pricing Officer. In suchcircumstances, according to Mr. Bhatt, the contention canvassed onbehalf of the writ applicant that no show cause notice under Section92CA(1) of the Act was issued to the writ applicant, is contrary to the record. Mr. Bhatt would submit that the principles of natural justice havebeen duly complied with. There is no element of prejudice caused to thewrit applicant inasmuch as the objections raised by the writ applicantwere disposed of by a speaking order and the T.P.O. would otherwiseprovide adequate opportunity of hearing before making any transferpricing adjustment. 19 Mr. Bhatt next submitted that indisputably, the writ applicant hadentered into an international transaction with the associated enterprisenamely the Hitachi International Treasury Limited. Section 92B of theAct defines the term “international transaction”. The Explanation (i)(c)to Section 92B defines the term “international transaction” as under: “(c) capital financing, including any type of long-term or short-termborrowing, lending or guarantee, purchase or sale of marketablesecurities or any type of advance, payments or deferred payment orreceivable or any other debt arising during the course of business;” 20Mr. Bhatt, referring to the aforesaid definition of the “internationaltransaction” submitted that for the purposes of Chapter X, “loan” is thetransaction which was required to be reported in the Form 3CEB. Thewrit applicant had availed loan from the associated enterprise. However,the writ applicant failed to report the said “transaction” i.e. the loanamount in the Form 3CEB. Mr. Bhatt pointed out that Section 92E of theAct read with Rule 10E of the Income Tax Rules mandates the personwho has entered into an international transaction to furnish report froman Accountant in the Form 3CEB. 20Mr. Bhatt, referring to the aforesaid definition of the “internationaltransaction” submitted that for the purposes of Chapter X, “loan” is thetransaction which was required to be reported in the Form 3CEB. Thewrit applicant had availed loan from the associated enterprise. However,the writ applicant failed to report the said “transaction” i.e. the loanamount in the Form 3CEB. Mr. Bhatt pointed out that Section 92E of theAct read with Rule 10E of the Income Tax Rules mandates the personwho has entered into an international transaction to furnish report froman Accountant in the Form 3CEB. 21 Mr. Bhatt pointed out that the Form 3CEB has been produced bythe writ applicant from page 13 onwards of the memorandum of the writapplication. The part A of Annexure to Form 3CEB, more particularly, item No.8 requires the assessee – the writ applicant to provide the“Aggregate value of international transactions as per books of accounts”.The writ applicant had reported an amount of Rs.50,14,114/-. However,the said figure does not include the loan amount of Rs.20 Crore takenfrom the Hitachi International Treasury Limited. Therefore, there is anadmitted failure on the part of the writ applicant to disclose suchamount of international transaction in the column No.8. 22Mr. Bhatt next submitted that Part B of the said Form, moreparticularly, item No.14 requires the assessee to fill in the particulars inrespect of lending or borrowing of money. There is no dispute betweenthe parties that the assessee had entered into an internationaltransaction as can be seen at page 17 wherein the writ applicant –assessee had remarked “Yes”. Item 14 requires the writ applicant toprovide details in respect of clauses (a) to (f) in respect of eachAssociated Enterprise and loan / advance. In the present case, the writapplicant failed to disclose the amount of loan taken from the AssociatedEnterprise in column (e) which requires the assessee to mention“amount paid / received or payable / receivable in the transaction”,which is clear from page 18 wherein the assessee had only disclosed theinterest paid and not the loan amount. It is submitted that the term“amount paid / received or payable / receivable in the transaction”relates to the international transaction in respect of lending orborrowing of money. Moreover, the assessee is required to providedetails in respect of each loan / advance. Therefore, the writ applicant’scontention that the said amount of loan is not required to be disclosed inForm 3CEB is factually incorrect and deserves no consideration. 23 Mr. Bhatt in the last submitted that the contention raised on behalfof the writ applicant that the transaction does not have impact on income is self-serving and dehors the records. It is submitted that theArm’s Length Price on the interest paid would have bearing on theincome of the writ applicant and therefore, the contention that theinternational transaction entered into by the writ applicant has nobearing on the income does not hold any merit. For the purpose ofarriving at the conclusion that the method adopted by the assessee andthe A.L.P. is in order, the basic figure required is of the loan amount. ISSUE OF LIMITATION: 23 Mr. Bhatt in the last submitted that the contention raised on behalfof the writ applicant that the transaction does not have impact on income is self-serving and dehors the records. It is submitted that theArm’s Length Price on the interest paid would have bearing on theincome of the writ applicant and therefore, the contention that theinternational transaction entered into by the writ applicant has nobearing on the income does not hold any merit. For the purpose ofarriving at the conclusion that the method adopted by the assessee andthe A.L.P. is in order, the basic figure required is of the loan amount. ISSUE OF LIMITATION: 24 Mr. Bhatt also submitted as regards the issue of limitation. He pointedout that this Court vide order dated 27[th] December 2019 was pleased tostay the Transfer Pricing proceedings and allowed the assessmentproceedings to go on. Section 153 of the Act provides for the time limitto frame assessment. The time limit to frame assessment for A.Y. 2017-18 as per Section 153(1) was 31[st] December 2019. In view of Section153(4), the time limit was extended by further 12 months as referenceunder Section 92CA(1) of the Act was made which expired on 31[st]December 2020. In view of the Covid-19 pandemic, the time limit toframe the assessment came to be extended till 31[st] March 2021 in lightof the Taxation and Other Laws (Relaxation of Certain Provisions),Ordinance, 2020. Explanation 1(ii) to Section 153 provides for exclusionof the period during which the assessment proceeding is stayed by anorder or injunction of any Court. The Act does not provide for anyexclusion of period during which the Transfer Pricing proceedings arestayed. In the event, this Court quashes the reference made to the T.P.O.,the assessment proceedings would get time barred. 25Mr. Bhatt invited the attention of this Court to the decision of theSupreme Court in the case of VLS Finance Limited vs. CIT reported in384 ITR 1. In the said case, the assessee had challenged the direction for Special Audit under Section 142(2A) of the Act and the High Court hadgranted stay against such direction for special audit without any stay onthe assessment proceedings. The Supreme Court held that the specialaudit is an integral part of the assessment proceedings i.e. withoutspecial audit it is not possible for the assessing officer to carry out theassessment and stay of the special audit may qualify as stay of theassessment proceedings itself and, therefore, would be covered by thesaid Explanation 1 to Section 158BE. Explanation 1 to Section 158BE ispari materia with Explanation 1 to Section 153 of the Act. Reliance hasbeen placed on paras 19, 20, 21 and 23 respectively wherein theSupreme Court has held that the stay of special audit qualifies as stay ofthe assessment proceedings and therefore, the period for the said stayhas to be excluded while counting the limitation period for assessingblock assessment period. 26Mr. Bhatt submitted that as per the Scheme of the Act, moreparticularly, Section 92CA(1) of the Act, where any assessee has enteredinto an international transaction or specified domestic transaction, theAssessing Officer may refer the computation of the arm’s length price inrelation to the said international transaction or specified domestictransaction to the Transfer Pricing Officer. The Transfer Pricing Officerafter providing full opportunity to the assessee, is required to pass orderunder subsection (3) of Section 92CA determining the arm’s length pricein relation to the international transaction or specified domestictransaction. Upon receipt of the order passed by the Transfer PricingOfficer under sub-Section (3) of Section 92CA, the Assessing Officerproceeds to compute the total income of the assessee in conformity withthe arm’s length price determined by the Transfer Pricing Officer. Mr.Bhatt would submit that it is clear that the Assessing officer cannotframe assessment sans the order of the Transfer Pricing Officer. 27Mr. Bhatt would submit that the Transfer Pricing proceedings is anintegral part of the assessment proceedings and therefore, the periodduring which proceedings before the T.P.O. was stayed is required to beexcluded for the purposes of computing limitation for framingassessment under Section 143(3) of the Act. 28 Mr. Bhatt, in support of his aforesaid submissions, has placedreliance on two decisions of this High Court: (i) M/s. D. B. Corporation Limited vs. Deputy Commissioner ofIncome Tax – Circle and others [Special Civil Application No.5035of 2016 decided on 10[th] August 2016] (ii) M/s. Veer Gems vs. Assistant Commissioner of Income Tax –Circle 7 and others [Special Civil Application No.12648 of 2011decided on 19[th] October 2011] ANALYSIS: 29Having heard the learned counsel appearing for the parties andhaving gone through the materials on record, the following twoquestions fall for our consideration: [1]Whether it was incumbent on the A.O. to have given thewrit applicant an opportunity of being heard before making areference to the T.P.O. under Section 92CA(1) of the Act? [2] Whether the Assessing Officer could be said to haveoverlooked the jurisdictional requirement of a satisfaction inaccordance with para 3.4 of the instruction No.3 of 2016 that there ought to be an income or a potential of an income arisingand/or being affected on determination of the A.L.P. of aninternational transaction or specified transaction? In the absenceof recording of such satisfaction, as to the income or potential ofan income, could it be said that the entire exercise undertaken bythe A.O. is illegal? 30On the first question i.e. as regards giving an opportunity ofhearing, Mr. Soparkar has placed strong reliance on the decision of theDelhi High Court in the case of Indorama Synthetics (India) Ltd (supra).Whereas Mr. Bhatt, the learned Senior Counsel appearing for theRevenue has placed reliance on the decision of this High Court in thecase of M/s. Veer Gems (supra). We first propose to look into thedecision of the Delhi High Court in the case of Indorama Synthetics(India) Ltd (supra). We quote the relevant observations: “12. To begin with it is required to be noticed that Chapter X containsprovisions regarding determination of ALP of international transactionsand specified domestic transactions. While Section 92C talks ofcomputation of ALP, Section 92BA defines a specified domestictransaction. For the purpose of the present petitions, it is not necessaryfor the Court to examine if in fact the Petitioner did enter into aninternational transaction and whether IPL could be said to be the AE ofthe Petitioner. The main issue in these petitions is whether it wasincumbent on the AO to have given the Petitioner an opportunity ofbeing heard before making a reference to the TPO under Section 92 CA(1) of the Act? 13. The relevant portions of Section 92CA of the Act, which deals interalia with the procedure to be followed in the making of a reference bythe AO to the TPO reads as under: "Section 92CA:- (1) Where any person being the Assessee, has entered into aninternational transaction or specified domestic transaction in anyprevious year, and the Assessing Officer considers it necessary orexpedient so to do, he may with the previous approval of the Principal Commissioner or Commissioner, refer the computationof the arm s length price in relation to the said international�transaction or specified domestic transaction under Section 92Cto the Transfer Pricing Officer. (2) Where a reference is made under sub-Section (1), theTransfer Pricing Officer shall serve a notice on the Assesseerequiring him to produce or cause to be produced on a date to bespecified therein, any evidence on which the Assessee may relyin support of the computation made by him of the arm s length�price in relation to the international transaction or specifieddomestic transaction referred to in sub-Section (1). Principal Commissioner or Commissioner, refer the computationof the arm s length price in relation to the said international�transaction or specified domestic transaction under Section 92Cto the Transfer Pricing Officer. (2) Where a reference is made under sub-Section (1), theTransfer Pricing Officer shall serve a notice on the Assesseerequiring him to produce or cause to be produced on a date to bespecified therein, any evidence on which the Assessee may relyin support of the computation made by him of the arm s length�price in relation to the international transaction or specifieddomestic transaction referred to in sub-Section (1). (2A) Where any other international transaction other than aninternational transaction referred under sub-Section (1), comesto the notice of the Transfer Pricing Officer during the course ofthe proceedings before him, the provisions of this Chapter shallapply as if such other international transaction is aninternational transaction referred to him under sub-section (1)(2B) Where in respect of an international transaction, theAssessee has not furnished the report under Section 92 E andsuch transaction comes to the notice of the Transfer PricingOfficer during the course of the proceeding before him, theprovisions of this Chapter shall apply as if such transaction is aninternational transaction referred to him under sub-Section (1). (2C) Nothing contained in sub-Section (2B), shall empower theAssessing Officer either to assess or reassess under Section 147or pass an order enhancing the assessment or reducing a refundalready made or otherwise increasing the liability of the Assesseeunder Section 154, for any assessment year, proceedings forwhich have been completed before the 1st day of July 2012. (3) On the date specified in the notice under sub-Section (2), oras soon thereafter as may be, after hearing evidence as theAssessee may produce, including any information or documentsreferred to in sub- section (3) of Section 92D and afterconsidering such evidence as the Transfer Pricing Officer mayrequire on any specified points and after taking into account allrelevant materials which he has gathered, the Transfer PricingOfficer shall by order in writing, determine the arm s length�price in relation to the international transaction or specifieddomestic transaction in accordance with sub-section (3) ofSection 92C and send a copy of his order to the Assessing Officerand to the Assessee." 14. Section 92CA reveals that there are certain jurisdictional perquisitesfor the making of a reference by the AO to the TPO. In the first place, the AO has to be satisfied that the Assessee has entered into aninternational transaction or a specified domestic transaction. Where, asin the present case, the Assessee raises a threshold objection that it hasnot entered into any international transaction within the meaning ofSection 92B of the Act, it is imperative for the AO to deal with such anobjection. If the AO decides to nevertheless make a reference, he has torecord the reasons, even prima facie, why he considers it necessary andexpedient to make such a reference to the TPO. 15. What is referred to the TPO is the determination of the ALP of thesaid international transaction or specified domestic transaction.Therefore, the satisfaction to be arrived at by the AO regarding theexistence of the international transaction or specified domestictransaction, even prima facie, is a sine qua non for making thereference to the TPO. Where such an Accountant's report is submittedby the Assessee in Form 3CEB, then there should be no difficulty for theAO to form an opinion, even a prima facie one, that it is necessary andexpedient to make a reference to the TPO on the question of thedetermination of the ALP of such international transaction involving theAssessee. 15. What is referred to the TPO is the determination of the ALP of thesaid international transaction or specified domestic transaction.Therefore, the satisfaction to be arrived at by the AO regarding theexistence of the international transaction or specified domestictransaction, even prima facie, is a sine qua non for making thereference to the TPO. Where such an Accountant's report is submittedby the Assessee in Form 3CEB, then there should be no difficulty for theAO to form an opinion, even a prima facie one, that it is necessary andexpedient to make a reference to the TPO on the question of thedetermination of the ALP of such international transaction involving theAssessee. 16. CBDT’s Instruction No. 3 of 2003 categorically states that in orderto make a reference to the TPO, the AO has to satisfy himself that theAssessee has entered into an international transaction with its AE. Oneof the sources from which the factual information regarding theinternational transaction can be gathered is Form No. 3 CEB filed withthe return which is in the nature of an Accountant’s report containingthe details of the international transaction entered into by the taxpayerduring the AY in question. Where no such report in Form 3 CEB is filedby the Assessee, what will be the basis for the AO to record that it isnecessary and expedient to refer the question of determination of theALP of such transaction to the TPO? Where the AO is of the view that atransaction reflected in the filed return partakes of the character of aninternational transaction, he will put the Assessee on notice of hisproposal to make a reference to the TPO under Section 92CA (1) of theAct. Before making a reference to the TPO, the AO has to seek approvalof the Commissioner/Director as contemplated under the Act.Therefore, all transactions have to be explicitly mentioned in the letterof reference. The very nature of this exercise is such that the AO willfirst put the Assessee on notice of his proposing to make a reference tothe TPO and seek information and clarification from the Assessee. If atthis stage, the Assessee raises an objection as to the very jurisdiction ofthe AO to make the reference, then it will be incumbent on the AO todeal with such objection on merits. 17. While Section 92CA (1) does not itself talk about a hearing havingto be given to the Assessee upon the latter raising an objection as to thejurisdiction of the AO to make a reference, such requirement appears to be implicit in the very nature of the procedure that is expected to befollowed by the AO. As already noticed, the AO has to record that heconsiders it necessary and expedient to make a reference. The AO hasto deal with the objections raised by the Assessee. It is only thereafterthat the AO can come to the conclusion, even prime facie, that it isnecessary and expedient to make the reference. This has to be doneprior to making a reference. 18. The further issue as far as the procedure to be followed is whetherthe AO is obliged to give the Assessee an opportunity of being heardprior to making the reference where an objection as to jurisdiction israised by the Assessee in relation to the making a of reference? 19.1 In Vodafone India Services (P) Limited v. Union of India (supra),the Bombay High Court was seized of a similar question relating to AY2009- 10.Vodafone India Services (P) Limited [“VISPL ] filed its return of�income along with Form 3 CEB in which the transaction of issuance ofequity shares by VISPL to its holding company (which it wasundisputedly an AE) was declared as an international transaction. Alsothe ALP of the shares so issued, was determined. However, a notice wasappended by the Accountant stating that the transaction of issue ofequity shares did not affect the income of the Assessee and was beingreported only as a matter of abundant caution. 19.1 In Vodafone India Services (P) Limited v. Union of India (supra),the Bombay High Court was seized of a similar question relating to AY2009- 10.Vodafone India Services (P) Limited [“VISPL ] filed its return of�income along with Form 3 CEB in which the transaction of issuance ofequity shares by VISPL to its holding company (which it wasundisputedly an AE) was declared as an international transaction. Alsothe ALP of the shares so issued, was determined. However, a notice wasappended by the Accountant stating that the transaction of issue ofequity shares did not affect the income of the Assessee and was beingreported only as a matter of abundant caution. 19.2 The return was picked up for scrutiny by the AO. Thereafter, theAO, after obtaining the previous approval of the Commissioner ofIncome Tax (“CIT ) referred all the transactions reported in Form 3 CEB�to the TPO under Section 92CA (1) of the Act. The TPO then issued ashow-cause notice (SCN) to VISPL on 14th December 2012, inter aliaasking it to show cause why the issue price (including the premium) ofthe equity shares to its holding company as declared by VISPL shouldbe accepted for the purposes of computing ALP under the Act. 19.3 In reply VISPL contended that the notice was completely withoutjurisdiction on the ground that provisions of Chapter X did not apply toissue of equity shares. Without prejudice, VISPL contested the SCN onmerits. The TPO passed an order on 28th January 2013 negativing theabove contentions of the Petitioner and proceeded to determine the ALPof the transaction in question. The AO then issued a draft assessmentorder under Section 143 read with Section 144-C(1) of the Act addingthe entire income determined by the TPO to VISPL's income. VISPL thenfiled objections to the draft assessment order before the DisputeResolution Panel (“DRP ). Objections were raised only with regard to�the issues of valuation and quantification and not with regard to theissue of jurisdiction. A writ petition was later filed in the Bombay HighCourt challenging the jurisdiction of the AO to make a reference of the above transaction to the TPO. 19.4 While discussing the provisions of Chapter X of the Act and inparticular Section 92CA thereof, the Bombay High Court observed asunder: "32. It is clear that in view of Section 92 (1), there must beincome arising and/or affected or potentially arising and/oraffected by an International Transaction for the purpose ofapplication of Chapter X. This would appear to be in the natureof jurisdictional requirement and the Assessing Officer must besatisfied that there is an income or a potential of an incomearising and/or being affected on determination of an ALP beforehe proceeds further in determining the ALP or referring the issueto the TPO to determine the ALP. In this case, we find that thePetitioner has from the very beginning been challenging thejurisdiction to apply Chapter X on the ground that no incomearises and/or is affected or potentially arises and/or is affectedon account of issue of its shares to its holding company. TheAssessing Officer does not deal with this objection/issue beforereferring the matter to the TPO. The TPO does not deal with theabove objection on the ground that in terms of Section 92CA, hismandate is only to compute the ALP in relation to theInternational Transaction. The TPO in the impugned order dated28 th January 2012 meets the Petitioner s objection by stating�that the same would be dealt with by the Assessing Officer.However, when the same objection was raised before theAssessing Officer post the order of the TPO, the Assessing Officerdoes not consider the same in the impugned draft assessmentorder dated 22nd March 2013 on the ground that in view ofSection 92CA (4), the Assessing Officer is obliged to pass anorder in conformity with the ALP determined by the TPO. Thisjurisdictional issue has to be dealt with either by the TPO or theAssessing Officer when specifically raised by thePetitioner/Assessee. 33. Normally when an accountant reports an international transactionunder Section 92E there may be no dispute that there is an incomearising and/or being affected or a potential of an income arising and/orbeing affected by an international transaction on determination of ALP.However when an Assessee challenges the above premise, then theissue must be decided. Such an issue must be dealt with at the verythreshold that is before determination of ALP. This is so because in caseit is held that in the International Transaction there is no income orpotential of any income arising and/or being affected on determinationof an ALP, the entire exercise of determining the ALP would becomeacademic. In terms of Section 92CA (4), the Assessing Officer is boundto pass an order in conformity with the ALP determined by the TPO as held by another Division Bench of this Court in the judgment dated 6thSeptember 2013 in Vodafone II case. However, where the AssessingOfficer is himself determining the ALP in terms of Section 94C (3) thenin accordance with Section 94C (4) he would compute the income,having regard to the ALP. In such cases, where the Assessing Officerdecides the ALP himself, it is open to him to consider the issue ofincome arising and/or being affected or not before commencing theproceedings under Chapter X or at the stage of passing an assessmentorder." 19.5 The Bombay High Court further observed that where the objectionis raised about the applicability of Chapter X of the Act, "then therequirement for takin