Rr Tower Iv, 8[Th] Floor,Tvk Industrial Estate, Guindy,Tamil Nadu-600 032 v. Assistant Commissioner Of Income Tax, Corporate Circle 3(1), Chennai, Wanarpathy Block

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED : 17.02.2021CORAMTHE HONOURABLE MR.JUSTICE T.S.SIVAGNANAMand THE HONOURABLE MS.JUSTICE R.N.MANJULA Judgment Reserved OnJudgment Pronounced On03.02.202117.02.2021W.A.Nos.1133 & 1134 of 2020andW.P.Nos 5760&35246/2019W.A.No.1133 of 2020 :-M/s.Transsys Solutions Private Limited,Rep., by its Directors, Mr.Venkata Krishnan S.,Plot Super A 16-17, RR Tower IV, 8[th] Floor,TVK Industrial Estate, Guindy,Tamil Nadu-600 032... Appellant/Petitioner-vs- 1.Assistant Commissioner of Income Tax,Corporate Circle 3(1), Chennai,Wanarpathy Block, No.121, Mahathma 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 ..Respondents/Respondents W.A.No.1134 of 2020 :- M/s.Transsys Solutions Private Limited,Rep., by its Directors,Mr.Venkata Krishnan S.,Plot Super A 16-17, RR Tower IV, 8[th] Floor,TVK Industrial Estate, Guindy,Tamil Nadu-600 032... Appellant/Petitioner -vs- 1.Assistant Commissioner of Income Tax, Corporate Circle 3(1), Chennai, Wanarpathy Block, No.121, Mahathma 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(2), 121, Nungambakkam High Road, Chennai-600 034... Respondents/Respondents Appeals under Clause 15 of the Letters Patent againstthe common order dated 15.10.2020 made in W.P.Nos.5760 and35246 of 2019 respectively. 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 dated19.12.2018 by the 2[nd] Respondent for the Assessment Year 2016-17, pursuant to the reference made by the 1[st] Respondent andquash the same as 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 inOrder 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 Appellant : Mr.N.V.Balaji,(In both Appeals)assisted by Ms.N.V.LakshmiFor Respondents:Ms.Hema Muralikrishnan,(In both Appeals)Senior Standing Counsel ****** COMMON JUDGMENT T.S.Sivagnanam, J.These appeals by the appellant/assessee are directedagainst the common order dated 15.10.2020, passed inW.P.Nos.5760 and 35246 of 2019 filed by the assessee. 2.W.P.No.5760 of 2019 was filed challenging the noticedated 19.12.2018, issued by the second respondent, theTransfer Pricing Officer (TPO), in exercise of his powersunder Section 92CA(2) and Section 92D(3) of the Income TaxAct, 1961 (hereinafter referred to as “the Act”) for theassessment year 2016-17. 3.W.P.No.35246 of 2019 was filed challenging the draftorder under Section 144C of the Act passed by the DeputyCommissioner of Income Tax on 27.11.2019. ****** COMMON JUDGMENT T.S.Sivagnanam, J.These appeals by the appellant/assessee are directedagainst the common order dated 15.10.2020, passed inW.P.Nos.5760 and 35246 of 2019 filed by the assessee. 2.W.P.No.5760 of 2019 was filed challenging the noticedated 19.12.2018, issued by the second respondent, theTransfer Pricing Officer (TPO), in exercise of his powersunder Section 92CA(2) and Section 92D(3) of the Income TaxAct, 1961 (hereinafter referred to as “the Act”) for theassessment year 2016-17. 3.W.P.No.35246 of 2019 was filed challenging the draftorder under Section 144C of the Act passed by the DeputyCommissioner of Income Tax on 27.11.2019. 4.The appellant filed their return of income on15.10.2016, for the assessment year under consideration, AY2016-17. Notice dated 27.07.2017, was issued under Section143(2) by the first respondent, the Assessing Officer, whichmentions the issue, which has been identified for examinationas to whether “value of international transactions iscorrectly shown in Form 3CEB and the return of income”.Subsequently, the TPO issued notice dated 19.12.2018, statingthat a reference has been received under Section 92CA(1) ofthe Act from the first respondent to determine the ArmsLength Price (ALP) under Section 92CA(3) in respect ofinternationaltransactionsenteredintobytheappellant/assessee during the financial year 2015-16. Theappellant was directed to produce evidence or material, whichthey may rely upon in support of computation made by them ofALP of the international transactions. 5.In paragraph 3 of the notice dated 19.12.2018, thelist of information and documents, which the assessee wasrequired to furnish/produce were mentioned. The assesseesubmitted their objection dated 03.01.2019, to the AssessingOfficer through their Chartered Accountant, objecting for thereference made under Section 92CA(2) and Section 92D(3) tothe TPO (second respondent) to determine the ALP. In thesaid objection, the appellant/assessee stated that the noticeissued under Section 143(2) of the Act dated 27.07.2017, isfor a limited scrutiny to identify as to whether the value ofinternational transactions is correctly shown in Form 3CEBand return of income, whereas the notice issued by the TPOstates that a reference has been received to determine theALP under Section 92CA(3) in respect of internationaltransactions entered into by the assessee during thefinancial year 2015-16. It was submitted that in terms ofthe reasons given in the Computer Aided Scrutiny Selection (CASS), is for a limited scrutiny, it only requiresreconciliation between Form 3CEB and return of income and itdoes not involve any TP risk parameters, which call fordetermination of ALP by reference to TPO. Therefore, it wassubmitted that the reference to the TPO for determination ofALP of international transactions, as done by the firstrespondent, is not authorized as per Instruction No.3 of 2016dated 10.03.2016, issued by the Central Board of Direct Taxes(CBDT) and therefore, the consequent process of determinationof ALP is also not in accordance with law and requested forwithdrawal of the reference made to the TPO. 6.The assessee addressed the TPO through their CharteredAccountant by letter dated 03.01.2019, informing the TPOabout their objection given to the first respondentquestioning the reference to the TPO and without prejudice tothe said objection, certain documents were forwarded.Subsequently, by letter dated 25.01.2019, the assesseefurnished further details to the TPO. Subsequently, theassessee filed W.P.No.5760 of 2019 challenging the noticeissued by the TPO dated 19.12.2018. 6.The assessee addressed the TPO through their CharteredAccountant by letter dated 03.01.2019, informing the TPOabout their objection given to the first respondentquestioning the reference to the TPO and without prejudice tothe said objection, certain documents were forwarded.Subsequently, by letter dated 25.01.2019, the assesseefurnished further details to the TPO. Subsequently, theassessee filed W.P.No.5760 of 2019 challenging the noticeissued by the TPO dated 19.12.2018. 7.While entertaining the writ petition, the learnedSingle Bench granted a limited interim order dated28.02.2019, after observing that the proceedings before theauthority can continue, however, no orders shall be passedtill the next hearing date. The writ petition was directedto be listed on 08.03.2019. The interim order was extendedtill 14.03.2019, by order dated 08.03.2019, and furtherextended till 29.03.2019, by order dated 14.03.2019.Subsequently, the interim order was not extended. TheTPO has passed an order dated 31.10.2019, under Section 92CA(3) of the Act determining the ALP of the internationaltransactions. 8.The Deputy Commissioner of Income Tax, CorporateCircle-3(2), Chennai, issued notice dated 25.11.2019, to theassessee informing them that they have received the order ofthe TPO dated 31.10.2019 and that the Department is not inpossession of any order staying the proceedings as on thesaid date and if there is any order of stay granted in theassessee's case, the same may be communicated to theDepartment on or before 27.11.2019. In response to the saidnotice, the assessee by reply dated 27.11.2019, informed theDeputy Commissioner of Income Tax that when the writ petitionwas posted for hearing, for extension of stay, the learnedStanding Counsel for the Department submitted that anassessment order was already passed for the assessment year2016-17 and therefore, the writ petition (W.P.No.5760 of2019) is infructuous. 9.Further, the assessee stated that their counselobjected to the passing of the assessment order, when the writ petition was pending and that the Court adjourned thematter by a week to ascertain as to whether assessment orderhas been passed. A draft order under Section 144C of the Actwas passed by the Deputy Commissioner of Income Tax on27.11.2019. This order was challenged by the appellant inW.P.No.35246 of 2019. 10.The writ petition filed in W.P.No.5760 of 2019challenging the notice dated 19.12.2019 was clubbed alongwith W.P.No.35246 of 2019 and both the writ petitions havebeen dismissed by a common order. This is how the assesseeis before us by way of these appeals. 11.Before us, the assessee seeks to prosecuteW.A.No.1134 of 2020, which has been filed challenging thedismissal of W.P.No.35246 of 2019. As stated above, the saidwrit petition was filed challenging the draft order underSection 144C of the Act dated 27.11.2019, passed by theDeputy Commissioner of Income Tax. 12.We have elaborately heard Mr.N.V.Balaji, learnedcounsel assisted by Ms.N.V.Lakshmi, learned counsel for theappellant/assessee and Ms.Hema Muralikrishnan, learned SeniorStanding Counsel for the respondents/Revenue. 11.Before us, the assessee seeks to prosecuteW.A.No.1134 of 2020, which has been filed challenging thedismissal of W.P.No.35246 of 2019. As stated above, the saidwrit petition was filed challenging the draft order underSection 144C of the Act dated 27.11.2019, passed by theDeputy Commissioner of Income Tax. 12.We have elaborately heard Mr.N.V.Balaji, learnedcounsel assisted by Ms.N.V.Lakshmi, learned counsel for theappellant/assessee and Ms.Hema Muralikrishnan, learned SeniorStanding Counsel for the respondents/Revenue. 13.The argument of the learned counsel for the appellantis that the solitary issue, which was identified forexamination in the limited scrutiny as per the notice issuedunder Section 143(2) of the Act dated 27.07.2017, is whethervalue of international transactions is correctly shown inForm 3CEB and return of income and that whether transactionsreported are at arms length or not, was not the issue forwhich, the assessee's case was taken up for limited scrutiny.Further, the TPO could not have taken up for determination ofthe ALP of the international transactions firstly on theground that the assessee's case was not selected for limitedscrutiny on the said ground and secondly, it would be inviolation of the instructions issued by the CBDT. Therefore,it is submitted that the reference to the TPO under Section92CA(1) of the Act is wholly without jurisdiction. 14.Reverting back to the notice dated 27.07.2017, andreferring to the reason for which the assessee's case wasselected for limited scrutiny, it is submitted that in thecounter affidavit filed in the writ petitions, the scope hasbeen increased and this is impermissible in law. In thisregard, the learned counsel referred to the decision inMohinder Singh Gill & Anr. vs. The Chief ElectionCommissioner, New Delhi & Ors., . Further,in response to the query raised by the Court qua, the findingrendered by the learned Single Bench in paragraph 13 of theimpugned order that the assessee had cooperated andparticipated in the assessment proceedings and has also filed objections to the draft order before the Dispute ResolutionPanel (DRP), which is pending, as to how the appellant wouldbe justified in prosecuting these appeals as already, theassessee is before the DRP raising all contentions.Mr.N.V.Balaji, would respond by referring to Section 144C(8)and submit that the issue raised in the writ petitions cannotbe agitated before the DRP, nor adjudicated by the DRP andtherefore, the assessee is justified in prosecuting theseappeals. Therefore, it is submitted that the learned SingleBench ought to have granted the relief sought for in the writpetitions. 15.Ms.Hema Muralikrishnan, would submit that theunderstanding of the appellant/assessee is wholly incorrectand this has been clearly brought out in the counteraffidavit filed in the writ petitions and it is not a case,where the Assessing Officer was denuded of jurisdiction tomake a reference to the TPO. The learned Standing Counselreferred to the reasons given in the CASS selection and theassessee is not right in contending that the case wasselected for limited scrutiny only. Further, the learnedcounsel referred to relevant paragraphs in the impugned orderand submitted that the learned Writ Court rightly rejectedthe relief sought for. 16.In reply, Mr.N.V.Balaji while briefly reiterating thesubmissions made earlier, had referred to the directionsissued by the CBDT in Instruction No.7/2014 dated 26.09.2014and Instruction No.20/2015 dated 29.12.2015 and thatinformation cannot be called for in a routine manner and aseparate instruction has also been issued fixing monetarylimits for selecting cases for scrutiny. 16.In reply, Mr.N.V.Balaji while briefly reiterating thesubmissions made earlier, had referred to the directionsissued by the CBDT in Instruction No.7/2014 dated 26.09.2014and Instruction No.20/2015 dated 29.12.2015 and thatinformation cannot be called for in a routine manner and aseparate instruction has also been issued fixing monetarylimits for selecting cases for scrutiny. 17.What is required to be considered in the instant caseis whether the assessee is right in contending that theassessee's case was selected for a limited scrutiny and thereference to the TPO was beyond the scope of the scrutiny.In this regard, it would be relevant to see the reason andthe issue for which, the assessee's case was selected forscrutiny, which is as hereunder:- ReasonUnderlyCodeReason DescriptionIssueingRationInformaaletionElementsTPLarge Aggregate valueWhether01.04of total employee costvalueofincomparisontointernationaAggregate value oflinternationaltransactionstransactions as perarebooksofaccountscorrectly(T.P.Risk Parameter)shownin(S.No.8 of Form 3CEBForm3CEBand Part A-P&L of ITR)and returnof income. 18.From the above, it is seen that the reason stated forselection of scrutiny was the large aggregate value of thetotal employee cost in comparison to aggregate value ofinternational transactions as per books of accounts and TPrisk parameters. The issue was whether the value ofinternational transactions are correctly shown in Form 3CEBand return of income. If the above is the reason and issuefor which the assessee's case was selected for scrutiny, canit be said that it is a case of a limited scrutiny. In ourconsidered view, such narrow interpretation cannot be givento the case on hand. 19.As rightly contended by Ms.Hema Muralikrishnan, thefirst respondent is not competent to check whether the valueof the international transactions as furnished in Form 3CEBby a Chartered Accountant and return of income is correctlyshown. Further, the Assessing Officer, being not competentto examine the said issue, necessarily, the case has to bereferred to the TPO as per Section 92CA of the Act.Therefore, we are of the view that the contention of theappellant/assessee that the case was selected for merereconciliation is an incorrect interpretation. This is clearfrom the reason for which the case was selected for scrutinyand the issue arising there from. Thus, we find that thereis no violation of the instructions issued by the CBDT. 20.In our considered view, the learned Single Benchrightly took note of these aspects as well as paragraph 3.4of the CBDT Instruction No.15/2015, which states that theissue on which a reference was thought to be necessary, hasto be explicitly mentioned in the Assessing Officer's letterseeking reference to the TPO and such letter of the Assessing https://hcservices.ecourts.gov.in/hcservices/ Officer dated 17.07.2018, was found to have complied with thesaid condition. The said letter is as follows:-"PAN: /2018-19Dated: 17/07/2018ToThe Principal Commissioner of Income-tax,Chennai-3,Chennai.THROUGH THE ADDL. CIT, CORPORATE RANGE-3, CHENNAIRespected Sir,\Sub: Computation of Arms Length Price – Request for 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 CASSand notice u/s 143(2) was duly served on the assessee.On examination of Form 3CEBN in this case, it isobserved that the assessee has entered intointernational transactions with its associatedenterprises as mentioned below:S.NoName of thePAN A.YCASS.AssesseeReason1M/s.TransAADCT4603N2016-(v)Largesys17AggregateSolutionsvalueofPvt. Ltd.totalemployee costin comparisonto aggregatevalueofInternationaltransactionsas per booksof accounts.(Form 3CEB) ***** For the A.Y. 2016-17, the following scrutiny casehas been selected for Limited scrutiny through CASSand notice u/s 143(2) was duly served on the assessee.On examination of Form 3CEBN in this case, it isobserved that the assessee has entered intointernational transactions with its associatedenterprises as mentioned below:S.NoName of thePAN A.YCASS.AssesseeReason1M/s.TransAADCT4603N2016-(v)Largesys17AggregateSolutionsvalueofPvt. Ltd.totalemployee costin comparisonto aggregatevalueofInternationaltransactionsas per booksof accounts.(Form 3CEB) 2. In view of the above, it is considerednecessary that a reference u/s. 92CA(1) be made tothe Transfer Pricing Officer for determination ofArm’s length Price for the said Transactions. Asper Sec.92CA(1) of the IT Act, a reference to TPOcould be made only with the prior approval of theCommissioner of Income-tax. Hence, it is requestedthat the necessary approval may kindly be grantedfor referring the case to the TPO.3. Copies of Form 3CEB and CASS reasons screenshot in the above mentioned case are enclosedherewith for your kind reference.” 21.Further, we also agree and endorse the findingrendered by the learned Single Bench that the reason forselection of scrutiny by CASS was only for numericalreconciliation is a over simplification of the reason statedfor selection. In fact, the learned Single Bench hasobserved that the officer might have been more detailed inthe choice of words employed so as to specifically refer tothe issue of total employee cost, however, non-reference tothis, is not fatal, as the reason for selection by CASS hasbeen produced and placed on record by the officer whileseeking approval of a Principal Commissioner of Income Tax(PCIT) for reference to the TPO. 22.Further, the Court noted that after the interimorder, which was initially granted, was not extended, theAssessing Officer issued show cause notice dated 11.10.2019,the appellant/assessee submitted their reply dated23.10.2019, enclosing various details on the computation ofthe ALP as sought for by the Assessing Officer. However, the affidavit filed in support of the writ petitions was silentwith regard to these facts. Thus, the learned Single Benchrightly concluded that the appellant has not only cooperatedand participated in the conduct of assessment, but has alsofiled objections before the DRP that are pending disposal.Hence, we are of the considered view that the learned SingleBench rightly dismissed the writ petitions and the order doesnot call for any interference. 23.For the above reasons, W.A.No.1134 of 2020 isdismissed. Consequently, there is no merit in W.A.No.1133 of2020. 24.In the result, the appeals are dismissed. No costs.Consequently, connected miscellaneous petition is closed.Sd/- Assistant Registrar(V) /TRUE COPY/Sub-Assistant Registrar abrTo1.Assistant Commissioner of Income Tax, Corporate Circle 3(1), Chennai, Wanarpathy Block, No.121, Mahathma 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(2), 121, Nungambakkam High Road, Chennai-600 034. +1CC to M/s.Hema Murali Krishnan Advocate, SR.NO. No. 9322.+2CCs to Mr.N.V.Balaji Advocate, SR.NO. No. 10020&10021.Pre-delivery Judgment made inW.A.Nos.1133 & 1134 of 2020JP-II(CO)NRA(17/03/2021)