M/S. Transsys Solutions Private Limited v. Assistant Commissioner Of Income Tax Corporate Circle 3(1), Chennai Chennai – Wanarpathy Block

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 15.10.2020 CORAM THE HONOURABLE DR. JUSTICE ANITA SUMANTHW.P. Nos.5760 & 35246 of 2019andWMP. Nos.6581, 6583, 36045 and 36047 of 2019 M/s. Transsys Solutions Private LimitedRepresented by its DirectorVenkata Krishnan S.Plot Super A 16-17RR Tower IV, 8[th] Floor,TVK Industrial Estate, Guindy,Tamil Nadu – 600 032.…Petitioner in both WPsVs 1.Assistant Commissioner of Income Tax Corporate Circle 3(1), Chennai Chennai – Wanarpathy Block, No.121, Mahatma Gandhi Road, Nungambakkam, Chennai-600 034. Corporate Circle 3(1), Chennai Chennai – Wanarpathy Block, No.121, Mahatma Gandhi Road, Nungambakkam, Chennai-600 034. 2.Assistant Commissioner of Income Tax TPO Circle 3(2), Chennai Income Tax Office – BSNL Tower No.16, Greams Road, Chennai – 600 006. …R1 & R2 in both WPs TPO Circle 3(2), Chennai Income Tax Office – BSNL Tower No.16, Greams Road, Chennai – 600 006. …R1 & R2 in both WPs 3.Deputy Commissioner of Income Tax, Corporate Circle 3(1), Chennai Chennai – Wanarpathy Block, No.121, Mahatma Gandhi Road, Nungambakkam, Chennai-600 034. ...R3 in WP.35246 of 2019 Corporate Circle 3(1), Chennai Chennai – Wanarpathy Block, No.121, Mahatma Gandhi Road, Nungambakkam, Chennai-600 034. ...R3 in WP.35246 of 2019 Prayer in WP.5760 of 2019: Writ Petition filed under Article226 of the Constitution of India praying Writ of Certioraricalling for the records on the file of the Respondents inITBA/TPO/S/92CA/2018-19/1014398051(1) in issuing the noticeu/s. 92CA(2) and 92D(3) of the Income Tax Act dated 19.12.2018by the 2[nd] Respondent for the Assessment Year 2016-17, pursuantto the reference made by the 1[st] Respondent and quash the sameas illegal, arbitrary and bad in law.Prayer in WP.35246 of 2019: Writ Petition filed under Article226 of the Constitution of India praying Writ of Certioraricalling for the records on the file of the 3[rd] Respondent in https://hcservices.ecourts.gov.in/hcservices/ Order No.ITBA/AST/F/144C/2019-20/1021197909(1) in passing theDraft order u/s. 144C of the Income Tax Act dated 27.11.2019by the 3[rd] Respondent for the Assessment Year 2016-17, andquash the same as illegal, arbitrary and bad in law. For Petitioner : Mr.R.Sivaraman For Respondents : Mrs.Hema Muralikrishnan Senior Standing Counsel COMMON ORDER The petitioner is a private limited company engaged inthe business of providing Software Business and TechnologySolutions to its clients. The challenge in WP.No.5760 of 2020is to an order passed by the 2[nd] respondent/AssistantCommissioner of Income Tax dated 19.12.2018 under theprovisions of Sections 92CA(2) and 92D(3) of the Income TaxAct, 1961 (in short ‘Act’) for assessment year (AY) 2016-17.Initially the petitioner had enjoyed an interim order to theeffect that while assessment proceedings may continue, noorder of assessment be passed. The interim order was howevernot extended beyond 29.03.2019. 2. As a result, the 3[rd] respondent/Deputy Commissioner ofIncome Tax took up proceedings for continuation andfinalization of assessment in the absence of an interim order.A draft order of assessment under Section 144C of the Act cameto be passed effectively rendering WP.No.5760 of 2019infructuous. The draft order of assessment came to bechallenged in WP.No.35246 of 2019. Since the learned counselfor the petitioner had challenged the basis of reference tothe Transfer Price Officer (TPO), the first writ petition wasalso kept pending and both matters were taken up for finalhearing together. 2. As a result, the 3[rd] respondent/Deputy Commissioner ofIncome Tax took up proceedings for continuation andfinalization of assessment in the absence of an interim order.A draft order of assessment under Section 144C of the Act cameto be passed effectively rendering WP.No.5760 of 2019infructuous. The draft order of assessment came to bechallenged in WP.No.35246 of 2019. Since the learned counselfor the petitioner had challenged the basis of reference tothe Transfer Price Officer (TPO), the first writ petition wasalso kept pending and both matters were taken up for finalhearing together. 3. The challenge to the order of assessment relates backto the reference made to the TPO dated 19.12.2018 and I amthus called upon to decide on the legality or otherwise ofthis reference. If the reference dated 19.12.2018 is found tohave been issued in excess of jurisdiction, then the noticefor assessment and all proceedings thereafter would berendered invalid. If on the other hand, I find that noticedated 19.12.2018 had been validly issued, there would be noinfirmity in the proceedings for assessment finalisedthereafter. 4. The agreed sequence of dates and events are set outbelow: (i) The petitioner filed an Income Tax Return on15.10.2016 within time for AY 2016-17. https://hcservices.ecourts.gov.in/hcservices/ Page numbers (ii) Notice dated 27.07.2017 issued under Section 143(2)by R1 states that the following issue has been identified forscrutiny contains the heading ‘Limited scrutiny (ComputerAided Scrutiny Selection) and whether value of internationaltransactions are correctly shown in Form-3CEB and return ofincome’. (iii) R1 has sought approval on 17.07.2017 from thePrincipal Commissioner of Income Tax (PCIT) for making areference to the TPO. It is here that the difference of opinion arises betweenthe petitioner and the revenue. According to the petitioner,the assessment was taken up for scrutiny only ‘limited’ basisand what needed to be ascertained was merely a comparison ofthe value of the international transactions as reflected inthe Form-3CEB with the value in the return of income.According to the revenue, the reference was for the purpose ofdetermining the Arms Length Price (ALP) of the internationaltransactions and the use of the word ‘value’ should not berestricted to a mere arithmetical comparison but should beseen to connote a determination of the pricing methodology ofthe international transactions. (iv) On 24.07.2017 PCIT recorded satisfaction for thereference sought and granted approval to the AO to make areference to the TPO. Once again, according to the petitioner, the approvalgranted by the PCIT is for a different reason from that statedin the notice under Section 143(2). (v) On 06.08.2018 R1 makes a reference to R2 to computethe ALP of Specified Domestic Transactions (SDT). (vi) Since the petitioner had not engaged in SDT, R1issued an amended reference to R2 to compute the ALP ofinternational transactions. (vii) Impugned notice dated 19.12.2018 was issued by R1to R2. (viii) On 03.01.2019, the petitioner objected to thereference vide communication dated 19.12.2018, raising thevery dispute as raised in this writ petition, that the limitedscrutiny notice dated 27.07.2017 only necessitated areconciliation between Form-3CEB and the return of incomefiled, and this exercise did not involve the examination ofTransfer pricing risk parameters. There was thus no necessityto make a reference to the TPO to determine ALP. Reliance inthis regard was placed on a Instruction issued by the CentralBoard of Direct Taxes (CBDT) bearing No.3 of 2016 dated10.03.2016. The relevant portion of the Instruction reads asfollows: https://hcservices.ecourts.gov.in/hcservices/ (vii) Impugned notice dated 19.12.2018 was issued by R1to R2. (viii) On 03.01.2019, the petitioner objected to thereference vide communication dated 19.12.2018, raising thevery dispute as raised in this writ petition, that the limitedscrutiny notice dated 27.07.2017 only necessitated areconciliation between Form-3CEB and the return of incomefiled, and this exercise did not involve the examination ofTransfer pricing risk parameters. There was thus no necessityto make a reference to the TPO to determine ALP. Reliance inthis regard was placed on a Instruction issued by the CentralBoard of Direct Taxes (CBDT) bearing No.3 of 2016 dated10.03.2016. The relevant portion of the Instruction reads asfollows: https://hcservices.ecourts.gov.in/hcservices/ 3.2. All cases selected for scrutiny, eitherunder the Computer Assisted Scrutiny Selection(CASS) system or under the compulsory manualselection system (in accordance with the CBDT’sannual instructions in this regard for example,instruction No.6/2014 for selection in F.Y.2014-15and Instruction No.8/2015 for selection in F.Y 2015-16), on the basis of transfer pricing riskparameters (in respect of international transactionsor specified domestic transactions or both) have tobe referred to the TPO by the AO, after obtainingthe approval of the jurisdictional PrincipalCommissioner of Income-tax (PCIT) or Commissionerof Income-tax (CIT). The fact that a case has beenselected for scrutiny on a TP risk parameter becomesclear from a perusal of the reasons for which aparticular case has been selected and the same areinvariably available with the jurisdictional AO.Thus, if the reason or one of the reasons forselection of a case for scrutiny is a TP riskparameter, then the case has to be mandatorilyreferred to the TPO by the AO, after obtaining theapproval of the jurisdictional PCIT or CIT. In Paragraph No.3.3 onwards, the Board states that theselection for scrutiny in cases not involving transfer pricingrisk parameters but where the assessee has engaged ininternational transactions or SDT shall only be in certainspecified circumstances. Such circumstances are (i) where theassessee has not filed a Section 92 report or where theinternational transactions are not disclosed in the reportfiled and the Assessing Officer comes to know about theinternational transaction/SDT entered into by the assessee,(ii) where a TP adjustment in excess of rupees ten crores foran earlier assessment year has been upheld by the authoritiesor is pending in appeal and (iii) where search and seizure orsurvey operations have been carried out and findings havebeen recorded by the Investigation Wing or the AO in regardto TP issues or SDT. The aforesaid circumstances do not,according to the petitioner, arise in the present case. (ix) On 03.01.2019 and 25.01.2019, written submissionswere filed by the petitioner before R2. (x) On 22.02.2019, the writ petitioner filed WP.No.5760of 2020 challenging the reference made by R1 to R2 dated19.12.2018 and obtained interim protection againstfinalization of assessment on 28.02.2019, 08.03.2019 and14.03.2019 effective till 29.03.2019, The interim protectionwas not extended thereafter. (xi) On 11.10.2019, a show cause notice was issued by R2for the purpose of determining ALP to which a reply was filedon 29.03.2019 by the petitioner. (xii) On 31.10.2019 R2 passes the Transfer pricing orderunder Section 92CA of the Act. (xiii) A draft order of assessment came to be passed byR3 under Section 144C of the Act on 27.11.2019 and theaforesaid order came to be challenged in WP.No.35246 of 2019. (x) On 22.02.2019, the writ petitioner filed WP.No.5760of 2020 challenging the reference made by R1 to R2 dated19.12.2018 and obtained interim protection againstfinalization of assessment on 28.02.2019, 08.03.2019 and14.03.2019 effective till 29.03.2019, The interim protectionwas not extended thereafter. (xi) On 11.10.2019, a show cause notice was issued by R2for the purpose of determining ALP to which a reply was filedon 29.03.2019 by the petitioner. (xii) On 31.10.2019 R2 passes the Transfer pricing orderunder Section 92CA of the Act. (xiii) A draft order of assessment came to be passed byR3 under Section 144C of the Act on 27.11.2019 and theaforesaid order came to be challenged in WP.No.35246 of 2019. (xiv) The narration in the impugned order is to theeffect that the assessment ‘has been selected through CASSwith the reason large aggregate value of total employee costin comparison to aggregate value of international taxation asper books of accounts’. According to the petitioner, thereasons adduced for selection of the assessment for scrutinyas per the draft order of assessment varies with the reasoningreflected in the scrutiny notice dated 27.07.2017. (xv) On 24.12.2019, the petitioner has approached theDispute Resolution Panel (DRP) objecting to the draft orderdated 27.11.2019. The assumption of jurisdiction by the TPOhowever, is not a matter of challenge before the DRP. 5. The learned revenue counsel has circulated a copy ofInstruction No.15 of 2015 issued by the Board on 16.10.2015which sets out the revised and updated Guidance notes forimplementation of T.P. provisions. The Instruction mandatesthat in order for the AO to make a reference to the TPO, heshould first ascertain that the assessee in question hasentered into international transactions, and gather basicdetails in connection therewith from the Form-3CEB, such asthe associated enterprises with which the transaction isentered into, the documents maintained and the methodologyfollowed. 6. Upon an examination of the aforesaid documents anddetails, the Assessing Officer should arrive at a prima faciebelief on whether a reference to the TPO is at all required.This is a preliminary stage which does not require detailedenquiry or scrutiny to verify the correctness of otherwise ofthe ALP. As an added safeguard, since not all cases ofinternational transactions are liable to be referred to theTPO, the approval of the Principal Commissioner orCommissioner is to be sought by the AO prior to making thereference to TPO. 7. Para 3.4 of Instruction 15/2015 reads as follows: ‘3.4. Before making a reference to the TPO,the AO has to seek the approval of the PrincipalCommissioner or Commissioner as provided in theAct. The provisions of Section 92CA of the Act, https://hcservices.ecourts.gov.in/hcservices/ inter-alia,refertotheinternationaltransaction.Hence,allinternationaltransactions, in relation to which a reference tothe TPO is considered necessary, have to beexplicitly mentioned in the letter through whichthe reference is being made.’ 8. In this case, the revenue has filed extracts of therecords of assessments in compilation dated 18.02.2020 thatreveal the following: Reason for selection by CASS (Computer Aided SearchSelection) ‘CASS Selection Reason and issuePAN AADCT4603NName TRANSSYS SOLUTIONS PRIVATELIMITED2016-17 ReasonReasonIssueUnderlyiRationCodeDescriptionngaleInformationElements TP01 .Large AggregateWhether04value of totalvalue ofemployee costinternatiis comparisononaltoAggregatetransactivalueofons areinternationalcorrectlytransactions asshown inper books ofForm 3CEBaccounts (T.P.andRisk Parameter)return of(S. No. 8 ofincomeForm 3CEB andPart A-P&L ofITR) 8. In this case, the revenue has filed extracts of therecords of assessments in compilation dated 18.02.2020 thatreveal the following: Reason for selection by CASS (Computer Aided SearchSelection) ‘CASS Selection Reason and issuePAN AADCT4603NName TRANSSYS SOLUTIONS PRIVATELIMITED2016-17 ReasonReasonIssueUnderlyiRationCodeDescriptionngaleInformationElements TP01 .Large AggregateWhether04value of totalvalue ofemployee costinternatiis comparisononaltoAggregatetransactivalueofons areinternationalcorrectlytransactions asshown inper books ofForm 3CEBaccounts (T.P.andRisk Parameter)return of(S. No. 8 ofincomeForm 3CEB andPart A-P&L ofITR) 9. Though initially a reference was made to thedetermination of value of SDT, upon ascertaining that thepetitioner had not engaged in SDT, the AO seeks approval fromthe PCIT to make a reference to the TPO. The reason forreference at column-4 cites the T.P. risk parameters as perCASS description extracted above. The approval sought isspecifically in regard to the aggregate value of totalemployee cost in comparison to aggregate value ofinternational transactions as per books of accounts. 10. The condition at para-3.4 of the Instruction is tothe effect that the issue on which a reference was thought tobe necessary has to be explicitly mentioned in the AOs letterseeking a reference to TPO. Such letter of the AO dated https://hcservices.ecourts.gov.in/hcservices/ 17.07.2018 is found to have complied with the aforesaidcondition and is extracted below: PAN: /2018-19Dated: 17/07/2018 To The Principal Commissioner of Income-tax,Chennai-3, Chennai. THROUGH THE ADDL. CIT, CORPORATE RANGE-3, CHENNAIRespected Sir,\ Sub: Computation of Arms Length Price – Requestfor approval – reference to Transfer Pricing Officer (TPO) – in the following case – AY 2016-17– Reg. ***** For the A.Y. 2016-17, the following scrutiny casehas been selected for Limited scrutiny through CASS andnotice u/s 143(2) was duly served on the assessee. Onexamination of Form 3CEBN in this case, it is observedthat the assessee has entered into internationaltransactions with its associated enterprises asmentioned below: S.NoName of thePAN A.CASS.AssesseeY.Reason1M/s.TransAADCT4603N2016-(v)Largesys17AggregateSolutionsvalueofPvt. Ltd.totalemployee costin comparisonto aggregatevalueofInternationaltransactionsas per booksof accounts.(Form 3CEB) NameandDescription of servicesAmountMethod usedaddress of theprovided/availed to/frompaid/receivedorforassociatedthe associated enterprisepayable/receivabledeterminingenterprise withfor the servicesthearm’swhomtheprovided/taken.length priceInternational[Sec sectiontransaction has92C(1)]been enteredinto.NameAddressTypeDescription TypeAs perAs computedBooksbytheAccountassesseehaving regardto the arm’slength priceTranssysUAEProvidedSoftwareReceived/217203133217203133solutionsto AEsolutionsFCZUAEReceivableComparableuncontrolledprice method 2. In view of the above, it is considered necessarythat a reference u/s. 92CA(1) be made to the TransferPricing Officer for determination of Arm’s length Price forthe said Transactions. As per Sec.92CA(1) of the IT Act, areference to TPO could be made only with the prior approvalof the Commissioner of Income-tax. Hence, it is requestedthat the necessary approval may kindly be granted forreferring the case to the TPO. 3. Copies of Form 3CEB and CASS reasons screenshot in the above mentioned case are enclosed herewithfor your kind reference.’ 11. A perusal of the above documents leads me in no doubtthat the proper procedure has been followed by the AssessingOfficer in approaching the PCIT seeking approval forreference. The PCIT, on 24.07.2018 grants approval in thefollowing terms: 3. Copies of Form 3CEB and CASS reasons screenshot in the above mentioned case are enclosed herewithfor your kind reference.’ 11. A perusal of the above documents leads me in no doubtthat the proper procedure has been followed by the AssessingOfficer in approaching the PCIT seeking approval forreference. The PCIT, on 24.07.2018 grants approval in thefollowing terms: ‘Letter dated 19.7.18 received from Addl CIT Corp.3requesting approval of Pr.CIT to refer the following cases toTPO for computation of Arms Length Price from Internationaland specified domestic transactions 2. M/s. Trimble Information Technologies IndiaPvt Ltd 3. M/s. Takato India Pvt Ltd 4. M/s. Transsys Solutions Pvt Ltd. https://hcservices.ecourts.gov.in/hcservices/ 5. M/s. Toshiba JSW Power Systems Pvt Ltd 6. M/s.Taeyang Metal India Pvt Ltd 7. M/s. Thinkbig Edu-Venture (India) Pvt Ltd 8. M/s. The Deal India Pvt Ltd. Addl CIT has submitted that as per Para 3.2 ofInst. No.3/2016 all the cases selected for scrutinyon TP risk parameter have to be referred to TPO afterobtaining approval of Pr.CIT. I have gone through the proposals and for thereasons given therein, approve the reference to TPOin all the above mentioned 8 cases for AY 2016-17.’ The petitioner is assessee No.4 in the list of eight casesapproved by the PCIT. 12. The petitioners’ submission to the effect that thereason for selection of scrutiny by CASS only involves anumerical reconciliation is, in my view an over simplificationof the reason stated for selection. Perhaps the officer mighthave been more detailed in the choice of words employed so asto specifically refer to the issue of total employee cost.However non-reference to this is not fatal as the reason forselection by CASS has been produced and placed on record bythe Officer while seeking approval of the PCIT for referenceof the matter to the TPO. 13. I may also incidentally point out that after theexpiry of the interim protection by this Court on 29.03.2019the Assessing Officer has issued a show cause notice dated11.10.2019 in response to which the petitioner has replied on23.10.2019 enclosing various details on the computation of theALP as sought for by the Officer. The affidavit filed insupport of the writ petition however, is silent in regard tothese facts. The petitioner has thus not only co-operated andparticipated in the conduct of assessment but has also filedobjections before the DRP that are pending disposal. 14. In the light of the discussion as above, I find nomerit in these writ petitions and dismiss the same. No costs.Connected miscellaneous petitions are closed. //True Copy// Sub Assistant Registrar vs To 1.Assistant Commissioner of Income Tax Corporate Circle 3(1), Chennai Chennai – Wanarpathy Block, No.121, Mahatma Gandhi Road, Nungambakkam, Chennai-600 034. 2.Assistant Commissioner of Income Tax TPO Circle 3(2), Chennai Income Tax Office – BSNL Tower No.16, Greams Road, Chennai – 600 006. 3.Deputy Commissioner of Income Tax, Corporate Circle 3(1), Chennai Chennai – Wanarpathy Block, No.121, Mahatma Gandhi Road, Nungambakkam, Chennai-600 034. W.P. Nos.5760 & 35246 of 2019andWMP. Nos.6581, 6583, 36045 and 36047 of 2019 SRA(CO)CB(08/12/2020)