Itxa/123/2018 Of Pr. Commissioner Of Income Tax-19 v. Kimberly Clark Lever Private Limited

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO. 123 OF 2018 Pr. Commissioner of Income Tax – 64[th] Floor, Aayakar Sadan, Bodhi Tower,Salisbery Park, Gultekdi,Pune – 411 037. V/s.Kimberly Clark Lever Private LimitedGat No. 934 to 937 Village Sanas Wadi,Taluka Shirur, Pune – 412 208. ….Appellant …Respondent ---- Mr. Suresh Kumar for Appellant.Mr. P.J. Pardiwalla, Senior Advocate a/w Mr. Hiten Chande i/b Lumiere Law Partners for Respondent. ---- CORAM : K.R. SHRIRAM & M.M. SATHAYE, JJ. DATED : 7[th] JUNE 2023 M.M. SATHAYE, JJ. ORAL JUDGMENT : (PER : K.R. SHRIRAM, J.) 1. The questions of law proposed are as under : SUBSTANTIAL QUESTION OF LAW 1. Whether on the facts and in circumstances of the case, theHon’ble Tribunal was correct in holding that the reasons recorded bythe assessing officer in the present case does not meet with therequirement of Section 147 of the Income Tax Act 1961 ? 2. Whether on the facts and circumstances of the case, the Hon’bleIncome Tax Appellate Tribunal was correct in holding that theAssessing Officer has no jurisdiction to issue notice under Section148 of the Act ? 3. Whether on the facts and circumstances of the case, the Hon’bleIncome Tax Appellate Tribunal was justified in the quashing theorder passed under Section 143(3) r/w Section 147 and 144C of theAct ? 4. Whether on the facts and circumstances of the case, the Hon’bleIncome Tax Appellate Tribunal was correct in holding that order ofthe Transfer Pricing Officer passed on 22/10/2010 is null & void ab initio as reference to the Transfer Pricing Officer to determine ArmsLength Price cannot be initiated in the case of assessee, in theabsence of any proceeding pending before Assessing Officer andreference for determination of Arms Length Price cannot precede theinitiation of assessment proceedings by the Assessing Officer byissuance of notice u/s 143(2) of the Act ? 2.Respondent is engaged in the business of manufacturingdiapers and sanitary napkins. Respondent also markets the consumer tissueproducts. Respondent had filed return of income declaring total income atRs.30,01,43,006/- on 31[st] October 2007 for Assessment Year 2007-08. 3.The return of income was processed under Section 143(1) ofthe Income Tax Act, 1961 (the Act). The Assessing Officer made referenceunder Section 92CA of the Act to the Transfer Pricing Officer (TPO) on 26[th]October 2009. The TPO passed an order under Section 92CA(3) of the Acton 29[th] October 2010 making an adjustment on account of arms length priceof the international transaction at Rs.12,17,43,370/-. The Assessing Officerrecorded reasons for re-opening the assessment and issued notice underSection 148 of the Act on 14[th] January 2011. Respondent vide its letterdated 28[th] January 2011 objected to the notice. It was the case ofrespondent that the reasons to believe income had escaped assessment wasbased on an invalid transfer pricing order and hence there was no reason forre-opening the assessment on the basis of the said order of TPO. The reasonwhy respondent took this stand was because respondent’s return of incomewas processed under Section 143(1) of the Act and there was no assessment proceeding pending under Section 143(3) of the Act during which areference could be made to the TPO under Section 92CA of the Act andhence such a reference to TPO itself was invalid and any order passed by theTPO would be invalid and such an invalid order of the TPO cannot be thereason for re-opening the assessment. Admittedly, no notice under Section143(2) of the Act had also been issued. The Assessing Officer has in factadmitted that the case was not selected for scrutiny and no notice underSection 143(2) of the Act was issued but in view of the findings of the TPOhe has re-opened the case for the Assessment Year 2007-08. proceeding pending under Section 143(3) of the Act during which areference could be made to the TPO under Section 92CA of the Act andhence such a reference to TPO itself was invalid and any order passed by theTPO would be invalid and such an invalid order of the TPO cannot be thereason for re-opening the assessment. Admittedly, no notice under Section143(2) of the Act had also been issued. The Assessing Officer has in factadmitted that the case was not selected for scrutiny and no notice underSection 143(2) of the Act was issued but in view of the findings of the TPOhe has re-opened the case for the Assessment Year 2007-08. 4.Mr. Pardiwalla submitted that where against the return ofincome filed by respondent in time no proceedings were initiated by issuingnotice under Section 143(2) of the Act. Reference made to the TPO by theAssessing Officer under Section 92CA(1) of the Act was invalid andconsequently the order passed by the TPO under Section 92CA(3) of the Actcould not be the basis for recording the reasons for re-opening theassessment, i.e., initiating re-assessment proceedings. Mr.Pardiwallasubmitted that where the Assessing Officer had re-opened the assessment bymerely making a reference to the order of the TPO which admittedly waspassed without any jurisdiction, then there was no independent applicationof mind by the Assessing Officer to commence the re-assessmentproceedings and in the absence of the same, the assessment proceedingscould not be re-opened. The reasons recorded for re-opening thePurti Parab assessment read as under : M/s. Kimberly Clark Lever Pvt. Ltd. A.Y. 2007-08 In the case reference u/s. 92CA(1) has been made to the TPoffice for the A.Y. 2007-08. The Jt. CIT(TP-1), Pune vide order u/s.92CA(3), dated 29/10/2010 has worked out adjustment in relationto international transactions of Rs.12,17,43 370/-. In view of the same, as per the adjustment of Rs.12,17,43,370/-to the total income, income chargeable to tax has escapedassessment within the meaning of section 147(c)(i) of the IncomeTax Act, 1961. I have therefore reasons to believe that income ofRs.12,17,43,370/- has escaped assessment for A.Y. 2007-08, onaccount of adjustment to International transactions carried out bythe assessee. The case satisfies conditions laid down in sections 149(1)(a)and 151(2) of the Income Tax Act, 1961. Issue notice u/s. 148 for A.Y. 2007-08. 5. 5.Before we proceed further we should note that it is judiciallywell settled that the belief of the Assessing Officer that there has beenescapement of income must be based on some material on record. Theremust be some material on record to enable the Assessing Officer to entertaina belief that certain income chargeable to tax has escaped assessment forthe relevant Assessment Year. In this case, the only material relied upon isthe order of the TPO. 6.The issue which arises is the validity of the assessmentproceedings initiated under Section 147/148 of the Act. As noted earlieradmittedly reference was made to the TPO for determining the arms length price of the international transaction and no notice under Section 143(2) ofthe Act was issued before making the said reference to the TPO. When noassessment proceedings were pending in relation to the relevant assessmentyear, in our view the Assessing Officer was precluded from making areference to the TPO under Section 92CA(1) of the Act for the purpose ofcomputing arms length price in relation to the international transaction. 7.The relevant provisions relating to the transfer pricingassessment are contained in Section 92 to 92 F of the Act. 6.The issue which arises is the validity of the assessmentproceedings initiated under Section 147/148 of the Act. As noted earlieradmittedly reference was made to the TPO for determining the arms length price of the international transaction and no notice under Section 143(2) ofthe Act was issued before making the said reference to the TPO. When noassessment proceedings were pending in relation to the relevant assessmentyear, in our view the Assessing Officer was precluded from making areference to the TPO under Section 92CA(1) of the Act for the purpose ofcomputing arms length price in relation to the international transaction. 7.The relevant provisions relating to the transfer pricingassessment are contained in Section 92 to 92 F of the Act. Section 92(1) of the Act provides that any income arising from aninternational transaction between associated enterprises shall becomputed having regard to the arm’s length price. Sections 92Aand 92B of the Act contain provisions relating to the meaning ofthe expressions “associated enterprise” and “internationaltransaction” respectively. Section 92C of the Act contains thepowers of the Assessing Officer and the manner of determination ofarm’s length price in relation to an international transaction.Section 92CA of the Act provides that where the Assessing Officerconsiders it necessary or expedient to do so, he may refer to theTransfer Pricing Officer the determination of the arm’s length price.Section 92CB of the Act relates to the power of the Board to makesafe harbour rules. Section 92D of the Act relates to Maintenanceand keeping of information and document by persons entering intoan international transaction. Section 92E of the Act prescribes thatthe person entering into international transaction shall furnish areport from a chartered accountant in Form No.3CEB. Section 92Fof the Act contains definitions of certain terms which are relevantto compute arm’s length price, etc. in terms of sections 92 to 92 Fof the Act. 8.The entire scheme and mechanism to compute any income arising from an international transaction entered between associatedenterprises is contained in Sections 92 to 92 F of the Act. Section 92CA ofthe Act provides that where the Assessing Officer considers it necessary or expedient so to do, he may refer the computation of arms length price inrelation to an international transaction to the TPO. In such a situation, theTPO, after taking into account the material before him, pass an order inwriting under Section 92CA(3) of the Act determining the arms length pricein relation to an international transaction. On receipt of this order, Section92CA(4) of the Act requires the Assessing Officer to compute the totalincome of the assessee in conformity with the arms length price sodetermined by the TPO. This means that the determination of the armslength price wherever a reference is made to him is done by the TPO underSection 92CA(3) of the Act but the computation of total income havingregard to the arms length price so determined by the TPO is required to bedone by the Assessing Officer under Section 92CA(4) read with Section92C(4) of the Act. 9.It is therefore quite clear that the process of determination ofarm’s length price is to be carried out during the course of assessmentproceedings, may it be, under Sub Section (3) of Section 92C of the Actwhere the Assessing Officer determines the arm’s length price or under SubSections (1) to (3) of Section 92CA of the Act, where the Assessing Officerrefers the determination of arm’s length price to the TPO. We may also referto the provisions of section 143(3) of the Act dealing with assessment ofincome. In terms of clause (ii) of Sub Section 3 of Section 143 of the Act, itis prescribed that the Assessing Officer shall, by an order in writing, make 9.It is therefore quite clear that the process of determination ofarm’s length price is to be carried out during the course of assessmentproceedings, may it be, under Sub Section (3) of Section 92C of the Actwhere the Assessing Officer determines the arm’s length price or under SubSections (1) to (3) of Section 92CA of the Act, where the Assessing Officerrefers the determination of arm’s length price to the TPO. We may also referto the provisions of section 143(3) of the Act dealing with assessment ofincome. In terms of clause (ii) of Sub Section 3 of Section 143 of the Act, itis prescribed that the Assessing Officer shall, by an order in writing, make an assessment of the total income or loss of the assessee, and determine thesum payable by him or refund on any amount due to him on the basis ofsuch assessment. It is only in the course of such assessment of total income,that the Assessing Officer is obligated to compute any income arising froman international transaction of an assessee with associated enterprises,having regard to the arm’s length price. 10.The occasion which requires the Assessing Officer to computeincome from an international transaction arises only during the assessmentproceedings, wherein he is determining the total income of the assessee.The Central Board of Direct Taxes (CBDT) in Instructions No. 3 dated 20[th]May 2003 has also stated that a case is to be selected for scrutinyassessment before the Assessing Officer may refer the computation of arm’slength price in relation to an international transaction to the TPO underSection 92CA of the Act. The relevant portion of the Instructions No.3/2003 reads as under : The Central Board of Direct Taxes, therefore, have decided thatwherever the aggregate value of international transaction exceedsRs.5 crores, the case should be pricked up for scrutiny and referenceunder section 92CA be made to the TPO. If there are more than onetransaction with an associated enterprise or there are transactionswith more than one associated enterprises the aggregate value ofwhich exceeds Rs.5 crores, the transactions should be referred toTPO. Before making reference to the TPO, the Assessing Officer hasto seek approval of the Commissioner/Director as contemplatedunder the Act. Under the provisions of section 92CA reference is inrelation to the international transaction. Hence all transactions haveto be explicitly mentioned in the letter of reference. Since the casewill be selected for scrutiny before making reference to the TPO, theAssessing Officer may proceed to examine other aspects of the caseduring pendency of assessment proceedings but await the report ofthe TPO on the value of international transaction before makingfinal assessment. 11.Therefore, we are inclined to uphold the proposition made byMr. Pardiwalla that an Assessing Officer can make reference to the TPOunder Section 92CA of the Act only after selecting the case for scrutinyassessment. The instructions of CBDT is also a pointer to the legislativeimport that the reference to the TPO for determining the arm’s length pricein relation to an international transaction is envisaged only in the course ofthe assessment proceedings, which is the only process known to the Act,whereby the assessment of total income is done. Therefore, in our view theTribunal was correct to hold that when reference was made to the TPO bythe Assessing Officer for determination of arm’s length price in relation tothe international transaction, no assessment proceedings were pending andhence it was invalid reference. Consequently, the subsequent order passedby the TPO determining the assessment to the international transaction wasa nullity in law and void ab initio. In view thereof, the Assessing Officercould not have relied upon an order of the TPO which is a nullity to form abelief that certain income chargeable to tax has escaped the assessment forthe relevant Assessment Year. 12.In the circumstances, in our view no case is made out to evenadmit the appeal. No substantial questions of law arise.