M/S. SAVA HEALTHCARE LTD,,PUNE vs. ASSISTANT COMMISSIONER OF INCOME TAX,, PUNE

आदेश / ORDER

PER SUSHMA CHOWLA, JM:

This bunch of appeals filed by assessee are against respective orders of ACIT, Central Circle 2(1), Pune, all dated 28.02.2017 relating to assessment years 2007-08 to 2013-14 passed under section 143(3) r.w.s. 144C(13) r.w.s. 153A of the Income-tax Act, 1961 (in short ‘the Act’).

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sake of convenience. However, in order to adjudicate the issues, we refer to the facts in ITA No.1062/PUN/2017, relating to assessment year 2007-08.

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Requirements u/s 92C(3) 3.1 The learned AO and learned DRP erred in law and on facts in not appreciating that no any opinion, as so envisaged in section 92C(3), as regards profit passing, etc. was reached by the then AO, before making a reference to the TPO for benchmarking of the international transactions of the appellant. 3.2 The learned DRP erred in law and on facts in putting the onus of substantiating absence of opinion, as so envisaged in section 92C(3) of ITA, 1961, on the appellant. The learned DRP ought to have appreciated that appellant can't substantiate a negative and on the contrary, onus lies on the revenue to substantiate the adherence to the procedure enshrined in section 92C(3) of the ITA, 1961. Benchmarking of imaginary transaction 4.1 The learned DRP erred in law and on facts in; deciding the Arm's Length price of an alleged assumed transaction that, the appellant has provided various services to AEs, and that too, without charging any consideration for the same. The learned DRP ought to have appreciated that there is no evidence to infer any such events. 4.2 The learned DRP erred in law and on facts in converting, equating the allegation of learned TPO as to "Control & Management from India" into some presumption/hypothetical services provided by the appellant to AE Parties. 4.3 The learned DRP erred in law and on facts in recording conflicting observations regarding TPO's allegation as regards "control and management from India" revealing from Para 5.3 to Para 5.3.2 as against Para 10.1.7.3 of the DRP order. Search material 5.1 The learned TPO / DRP / AO erred in law and on facts in not appreciating that, in a search based assessment, no any addition to the taxable income is plausible, in absence of any Incriminating Material found / seized during the course of search u/s 132 of ITA, 1961. 5.2 The learned I-T authorities erred in law and on facts in not appreciating that, the programmatic screenshots seized during search, were not found on, and seized from, computers of the appellant and as such, do not partake character of incriminating material. 5.3 The learned I-T authorities further erred on facts in not appreciating that the emails of various employees of other group companies in India, collected from third parties in post search enquiries, do not partake character of incriminating material. 5.4 The learned I-T authorities further erred in drawing conjectures and surmises on the basis of statements of third parties / employees of other group concerns (except Mr. Vinod Jadhav, who is a paid common director of many group companies). The learned authorities ought to have appreciated that such statements do not partake character of incriminating material at all.

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5.5 The learned I-T authorities erred in law and on facts in not appreciating that, the alleged search material, does not indicate the alleged provision of services provided by appellant to the AE entities. Most Appropriate Method 6.1 The learned DRP erred in law and on facts in rejecting the TNMM approach and applying the PSM approach for benchmarking of international transaction for supply of goods to AE parties without any cogent reasons and in an arbitrary manner & thereby making adjustment amounting to Rs.29,78,900/-. 6.2 The learned DRP erred in law and on facts in not appreciating the appellant's submissions as regards MRP rules and regulations prevailing in India, and not appreciating further efforts of the appellant in establishing that the prices for goods charged to the AE parties, are comparable to the prices for very same products charged by Arm's Length Parties. The learned DRP erred in not giving any specific finding on the alternate submissions on CUP approach in this regard. 6.3 Assuming the PSM is appropriate method for benchmarking the learned DRP erred in law and on facts making hypothetical segregation between routine profits & residual profits under PSM approach. Quantification of routine profits 7.1 The learned DRP erred in law and on facts in selecting PLI for deciding routine profits as ―Gross Profit /COGS" which is not envisaged by any method prescribed u/s 92C of ITA,1961 read with rules 10B of ITR, 1962. 7.2 The learned DRP erred in law and on facts in selecting comparable companies for working out Arm's Length PLI, without applying the filter of export sales to total sales. The learned DRP erred in law in not appreciating that functions and risks involved in export activity are materially different than domestic sales activity. 7.3 The learned DRP erred in law and on facts in not appreciating that, if the OP : OC PLI is taken instead of Gross Profit for the very same selected companies, then the average margin earned by appellant is well within +/- 5% permissible limit as envisaged by ITA, 1961. 7.4 The learned DRP erred in law and on facts in providing adjustment on account of marketing functions in an incorrect manner. 7.5 The learned DRP erred in law and on facts in not providing any working capital adjustment to the appellant. Residual Approach under PSM method 8.1 The learned DRP erred in law and on facts in working out the residual profits to be attributed to the appellant, considering each AE as a separate entity. The learned DRP erred on facts in testing each AE entity separately on the one hand; and; making FAR analysis of all the AEs on totality basis on the other hand. The learned DRP ought to have considered all the AEs together while working out residual profits. 8.2 The learned DRP erred in law and on facts in comparing PLI of the domestic comparable companies with PLI of AEs to determine the

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residual profits attributable to appellant. The learned DRP ought to have appreciated that, considering geographical distances, Indian comparable companies ought not to have been used for benchmarking quantum of residual profits of the AE entities. 8.3 The learned DRP erred in law and on facts in allocating arbitrary and ad-hoc weights to the FAR (i.e. functions, assets & risks) while determining the residual profits. 8.4 The learned DRP erred in law and on facts in making arbitrary ad-hoc and incorrect splitting up of the residual profits between the appellant and it's AE entities. 8.5 Learned DRP erred in law and on facts in drawing incorrect conclusions and making wrong conjectures from the quantum of software expenditure, electricity expenditure, manpower cost, etc. incurred by the appellant vis-a-vis the AE parties. 8.6 The learned I-T authorities erred in law and on facts in not accepting the detailed PSM working based on the OECD guidelines, though the same was submitted by the Appellant during the course of hearing. Prima facie mistakes 9.1 The learned DRP erred in law and facts in incorrectly appropriating 60% of the business development function to the appellant, instead of 40% revealing from the findings thereto. The learned DRP erred in making allocation contrary to their own finding in Para-13.7.22. 9.2 The learned DRP erred in law and facts in not granting telescoping of higher routine profits while determining residual profits attributable to appellant in Para-13.7.18.3 read with Para-13.7.17.2. 9.3 The learned DRP erred in law and facts in making addition of value of international transactions amounting to Rs.77,367,713/- to the return of income while determining the assessed income of the appellant in Para- 16 of the DRP order.

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the requirement under section 92C(3) of the Act. The assessee in this regard, has raised grounds of appeal No.1 to 4.3 on this issue along with modified ground of appeal No.1, which we shall deal with in the first instance.

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different countries worldwide. Till April, 2010, the assessee group was engaged in export trading of third party pharmaceutical products / drugs to foreign countries. In April, 2010, the assessee group diversified its activity by acquiring pharmaceutical division of M/s. Biodeal Laboratories Pvt. Ltd., Surendranagar, Gujarat. The assessee group also acquired manufacturing facility of Dhanvantari Botanicals Pvt. Ltd., Malur, Karnataka through its group company M/s. Sava Pvt. Ltd. The said concern was engaged in manufacturing of herbal preparations and herbal medicines.

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exempt. It was further noted by him that subsequently the Settlement Commission rejected the claim of Mr. Vinod Jadhav and declared him as Resident. In such backdrop, Search and Seizure under section 132 of the Act was carried out in the premises of group on 31.10.2012. The Investigation Team observed that affairs of these group companies revealed that the assessee was selling medicines and drugs from India to the customers in various parts of world using the route of Singapore. The proceeds of sale on such products were realized in the bank accounts of the companies registered in Mauritius / UAE. All of such sales to customers and various countries, as per the TPO, were artificially shown to be made by UAE based companies and income was shown to be earned by Mauritius / UAE based companies. He was of the view that this was done in order not to pay taxes, in India, on the huge profits earned in the business. Such profits were repatriated to the promoter of the group Mr. Vinod Jadhav in the guise of salary, commission, etc. and he had claimed salary of ₹ 39.20 crores as exempt. The TPO under para 4 at pages 2 and 3 of order has tabulated the domestic and foreign companies which were engaged in the exporting third party medicines and pharma products and allied activities. The TPO noted that profiles of different concerns as part of group and first of all commented on the profiles of domestic companies and observed as under:- i) Anagha Pharma Pvt. Ltd. (assessee). This was a flagship concern of assessee group, which was engaged in business of trading and export of third party medicines to foreign countries. Based on the orders received in retail and wholesale segment, it procured material of the products from local distributors in Pune and exported it to the customers all over the world. It was commented upon by the TPO that the assessee had procured

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material on its own, shipped the material to warehouses in Singapore and Mauritius and booked the sales as in the name of UAE based companies.

ii) SAVA Medica Ltd. This was a new company incorporated in financial year 2010-11 and was a holding company for M/s. Biodeal Laboratories Pvt. Ltd., of whose pharma division was taken over by assessee group. The said concern SAVA Medica Ltd. was engaged in manufacturing of pharma products, medicines and also trading and export of third party medicines to foreign countries. It has shown sales only to a single group entity i.e. UAE based companies.

iii) SAVA Pvt. Ltd. This company was earlier known as SAVA Infotech Pvt. Ltd. The company was incorporated in financial year 2009-10 for the purpose of processing orders received from customers all over world. The orders were said to be received on behalf of UAE based company. The assessee processed the orders in its Pune office through its employees and orders received were executed through Pune based office. The said concern also acquired assets of the company namely Dhanvantari Botanicals Pvt. Ltd., Malur, Karnataka in financial year 2011-12. The concern Dhanvantari Botanicals Pvt. Ltd. was engaged in manufacturing and production of herbal products and preparations.

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claimed the same as exempt by claiming himself to be non-resident Indian (NRI) for the F.Y. 2009-10.

ii) Such orders were received from the customers based abroad through e-mail attachments on the specified e-mail IDs

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iii) Such orders were also received through the web-service portals (SOAP) which are provided to the major customers like BBG, DSP, JAN DRUGS, OPL etc. iv) There is no role of the UAE based companies in receipt of such orders from the customers all over the world. C) Maintenance of service to the customers:

On the perusal of the e-mail conversations between BytzSoft and the i) personnel in the SAVA group of Pune it is seen that the clients of the assessee group based in different countries are involved. These customers are corresponding directly with the SAVA group ii) people in India. This is without any involvement from UAE based company.

D) Merchandising and Shipping of the orders: JadePharma was connected to the warehouses in Singapore and i) Mauritius. The warehouse personnel updated the JadePharma with the data about stock position in these warehouses. Based on this the stock report sheet was prepared and forwarded to the Supply Chain Management personnel in SAVA Pune. Supply chain management procures the goods/products from open ii) market or wholesalers in Sadashiv Peth, Pune iii) Such products are shipped by Anagha Pharma Pvt. Ltd. to the warehouses in Singapore and Mauritius. This is generally done once in 15 days. The bills are raised on UAE based company as it is shown as the buyer and legal owner of the stocks in Singapore and Mauritius. However, it is a fact that all of this process is carried out by Pune based employees without any involvement of UAE based companies. iv) For some of the products, these are procured from Mauritius, Singapore and some other countries. The quantum of such procurements as per their purchase invoices is not much.

v) The processed orders are available on JadePharma for which access was given to the warehouses. Based on the processed orders and the labels prepared and sent to these warehouses from Pune, the warehouse staff packs the goods in export packs and ships the same to the customers through the DHL Global mail. Some of the wholesale orders are shipped directly to the end customers from India by APPL.

vi) The details about shipping are uploaded from the warehouses in JadePharma. Earlier, before they were connected to JadePharma, they used to upload such details in www.savaordersystem.biz. After the access of JadePharma was given to them, they are updating the details of shipping on JadePharma which in turn is connected to www.savaordersystem.biz E) Tracking of the shipments:

i) Once the order is shipped to the customers, automatic mail is sent by JadePharma to the customers conveying the details of the shipments

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along with the fog-in details of such customers. The customer logs in on www. savaordersystem.biz and could view the status of their orders which are shipped by SAVA. ii) In case of any problems in shipping of the shipments, the customers mailed such problems to orders@savaglobal.com which were sorted out by the SAVA group persons In pune. F) Pricing of the products: i) In JadePharma there were different modules for retail and wholesale operations. The pricing of the products was different for different operations and it appears it was different for different customers also. The prices of various products are also advertised on the websites. Such prices are decided by Shri VInod Jadhav and entered into JadePharma as per his instructions. ii) There is nobody responsible enough with UAE based company to decide the pricing of the products.

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xiii) Feeding the data of shipping in JadePharma which is connected to www.savaordersystem.biz. xiv) Before JadePharma V2 such data was manually uploaded to www.savaordersystem.biz. xv) Tracking of the shipments. xvi) Solving the problems of the customers linked to tracking of the shipments and receipt of the orders- customer care, xvii) Ensuring that the orders are not processed if there is no confirmation of payment from the customer as all the payments are received In advance. xviii) Generation of various reports of UAE based companies like stock report sheet, sales report, purchase report, daily sates reports etc. xix) Generation of the sales invoices of UAE based companies xx) Control of accounting of UAE based companies. B) Singapore (Contractor DHL - as per agreement dated 01/02/2008): i) Maintenance of the stock in warehouses ii) Shipping of the products as per the addresses and particulars received from India iii) Updating the shipping data in JadePharma or sending such data to India based concerns iv) Procurement of medicines/products if the stock is depleted as per the directions of Shri Vinod Jadhav and India based concerns C) UAE and Mauritius based concerns: i) Maintenance of the bank accounts in which the payments are received in respect of the sales made from India. ii) Payments for various expenses through RTGS or other instruments as per the directions of Shri Vinod Jadhav. iii) Signing on various agreements and documents as per the directions of Shri Vinod Jadhav and Pune based employees. iv) Maintenance of books of account as per the directions of Pune based employees and Shri Vinod Jadhav.

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module of the assessee was dependent on internet; for which the assessee first developed software as JadePharma Ver.1 in 2007 and went on to upgrade it as and when business grew. The TPO then has drawn diagram explaining the processing of orders using JadePharma software under para 13 at pages 15 to 17 of the TPO’s order and he observed that from this diagram it could be easily understood that the goods which were procured from India for its trading activity, were dispatched to Singapore; payment of the goods were received in Dubai, which were then remitted to India by merely processing the payments through online banking, which is also being undertaken in India and by employees of assessee. He further observed that transactions pertaining to remittances made by Mauritius and Dubai AE’s were inter-related sales by the assessee from Singapore. He thus, observed that these transactions are so inter-linked that its profitability cannot be evaluated separately. We are referring to diagrams at pages 15 to 17 but the same are not being reproduced for the sake of brevity.

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was not most appropriate method for benchmarking such complex transactions, which as per him were designed to escape the legitimate taxation in India and which have been made with the sole intent of tax evasion. He thus, proposed that Profit Split Method was the best method to benchmark transactions undertaken by assessee with its AE’s and the profits earned by them. He was of the view that not only the transactions were complex but its correct profitability in India could not be ascertained by using TNMM method as most appropriate method. He thus, proposed to benchmark international transactions of assessee by using Profit Split Method as most appropriate method. He referred to para 2.108 of Chapter II of OECD Guidelines, which provides the basics of Profit Split Method and also referred to para 2.111 and para 3.9 referred on para 2.108 of OECD guidelines and vide para 15.6 notes that provisions of Profit Split Method (PSM) under Income Tax Rules (in short ‘the Rules’). The assessee in this regard was thus issued separate show cause notice for the individual assessment years and was asked to state as to why TNMM method should not be rejected as the most appropriate method and why PSM method should not be treated as most appropriate method for the transactions entered into by the assessee. In the show cause notice, the TPO referred to Rule 10AB of the Rules, on without prejudice basis, and pointed out that the alternate method which was known as safe method was also proposed to be applied to the transactions and under this method, 97% of profits of AEs were proposed to be adjusted in international transactions of assessee.

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India. In this regard, the assessee sought evidences on the basis of which this conclusion was drawn by Investigation Wing and by the TPO. The TPO in this regard observed that holistic view of entire facts gathered during search proceedings and TP proceedings lead to the conclusion that entire business model was the brainchild of Shri Vinod Jadhav, who was the director of assessee company. In this business model, the orders were processed and fulfilled and executed from India; billing of sales from customers all over world was done in the name of Mauritius / UAE based companies and the amounts were received in the bank accounts of these AE companies. The TPO further observed that there were plenty of evidences in this regard. He referred to statements of Shri Vinod Jadhav and his employees recorded during the course of search and even the statement of software developer was recorded. He also referred to about 400 e-mails obtained during the course of search proceedings. He again then refers to JadePharma Ver.1, which was developed as desktop based system without access through web to multiple locations. The said system was installed onsite by Bytzsoft Technologies Pvt. Ltd. in the earlier office of Sava group in Ramwadi, Viman Nagar, Pune. The TPO observed that screenshots clearly show that various modules and procedure existing in the software and various reports enabled through this software. He then, analyzed procedure wherein sale orders were received by assessee group based in Pune through e-mail attachments from different customers, buyers and affiliates based all over the world. During the course of search proceedings, the assessee had consistently tried to show that orders were received through its AEs but since the assessee could not produce evidences in support, the TPO observed that there was no need for the orders to either originate from UAE or get routed through it. The epicentre of the process, as per him, was situated in software managed and controlled by the employees of

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SPL, Pune. He thus, did not accept the contention of assessee regarding receipt of orders from UAE being tenable and infructuous. He further observed that orders from customers received through e-mail attachments were then uploaded to JadePharma Ver.1.0 for processing; after the orders were processed for their accuracy and compliance and prescription attachments, these were sent to Supply Chain Management for fulfilment through shipping of ordered medicines / products. This sheet of processed orders containing various details of customers and suppliers including the quantity of products was exchanged through emails with the warehouses in Singapore and Mauritius, from where these shipments were to be shifted to the end customers. The shipment of consignment was vide arrangement with DHL Global. In this regard, it was also noted by the TPO that some of the shipments in case of wholesale business were directly shipped by the assessee to the end customers. In all the transactions, sale consideration was received in advance from the customers and the order was processed only after the payment was received. He further observed that stock in warehouses of Mauritius and Singapore was replenished with procurement and supply from India based companies and third parties in few instances. Once the order was shipped, the reports of such sales were generated in JadePharma Ver.1.0, which would generate invoices which could be converted to pdf format and printed. The TPO was of the view that invoices of sales shown in UAE based companies were prepared in India, rejected the plea of assessee that invoices were obtained from UAE based companies and were prepared in UAE by them. Similar reference was made to JadePharma Ver.2, which upgraded earlier Ver.1 in financial year 2009-10. The TPO in this regard observed that receipt of orders and processing of them was same as that of Ver.1.0. But the

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warehouses were linked through web services to JadePharma and there was no need to send e-mails to the warehouses for shipping of products.

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proved beyond doubt that real entity behind entire business was the assessee only and the AEs in Dubai and Mauritius were nothing but shell companies. Though the assessee explained that subsequent agreements were entered with DHL and the scope of DHL was reduced only to postal distribution services. However, copies of agreements were not filed. The TPO did not accept the said explanation of assessee. He reiterated by saying that AEs in Mauritius and UAE did not have any role to play except making of payment for the godown rent and hence, it was clearly proved that entire control and management of affairs of assessee group was wholly situated in India. On repeated pleas raised by assessee that it had not been permitted to sell the goods at retail in India and that it cannot sell them out of India, at a rate more than M.R.P. was also not accepted on the ground that the assessee had failed to give any documentary evidence in support of its claim. The assessee at the beginning of TP proceedings itself had submitted that it had been granted license to sell wholesale drugs out of India and had also been awarded an ‘Outstanding Export Award’ for the year 2009-10. The TPO in this regard observed that this plea is not acceptable and ‘Even otherwise, whether the activity was legal or illegal is not relevant as far as the Income-tax proceedings are concerned.’ It is well settled law. The TPO also asked the assessee to submit documentary proof of any activity carried out in Dubai during financial years 2006-07 to 2012-13. The assessee pointed out that during post search enquiries on 29.01.2013, Investigation Wing took the video of assessee, wherein two of its employees Shri Umesh Pawar and Shri Sunil Kataria were present. The TPO observed that these enquiries were firstly conducted much after search proceedings and it did not prove that the assessee was carrying on activities during the period under consideration. In the absence of documentary proof of employees employed in Dubai and the

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details of salary being paid to them, the existence of employees, if any could not be verified and plea of assessee that it was bound by confidentiality clause was rejected. The TPO was of the view that in the present circumstance, there was necessity to lift the corporate veil. He stressed vide para 25.1 that day-to- day activities of AEs in Mauritius and Dubai were operated from India. He further observed that there were no employees in Mauritius and the employee cost, other than the amount paid to Shri Vinod Jadhav was negligible. However, the employee cost in Pune based company was very high. Hence, it was obvious that all the above activities were carried out in India, in Pune on the directions of Shri Vinod Jadhav. He thus, concluded by holding that affairs of parent company i.e. assessee and AEs in Mauritius and Dubai needed to be treated as wholly. All the brain and functions of group was situated in India and minuscule work of receiving and sending money was left with the AEs in UAE and Mauritius.

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the functions of AEs were treated as functions of banking agent, with no functions to be performed, except to receive the money of sale proceeds. It was thus, proposed to allocate only 3% of profit to the AEs and the balance 97% was proposed to be allocated to the assessee. The assessee in response to show cause notice pointed out that as per OECD Commentary on the related issue, for allocating profits under PSM method, appropriate comparables ought to be provided on record; but the same was missing in show cause notice. As per OECD, in case of total absence of external comparables, appropriate allocation keys could be resorted to for finding out logical profits which could be attributed to a jurisdiction. Such allocation keys could be assets based, expense based, capital employed based, floor area base, headcount base, etc. He then pointed out that it was a fit case to resort to average allocation ratio i.e. average of assets plus expenses allocation keys and pointed out that the steps to be taken in this regard which are reproduced at page 83 of TPO’s order. The TPO thus, worked out year-wise excess profits attributable to the assessee under the same, without prejudice to PSM approach, and worked out excess profits of assessee for the years under consideration. The TPO in this regard was of the view that principally the assessee had agreed for treating the Profit Split Method as the most appropriate method but the working of assessee on perusal was rejected in toto. He was of the view that correct basis would be FAR analysis of entire transactions. Again reference was made to guidelines of OECD and again the TPO referred to FAR analysis for division of profits, which we have reproduced in the paras hereinabove and also referred to the functions, which as per him, were performed by entities in different countries and based on the said finding, the FAR analysis of assessee and AE’s in Mauritius and Dubai were finalized as under:-

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Function UAE based Singapore Mauritius Anagha Sava company (through based Pharma Pvt. Medica DHL) company Ltd., India Ltd. Development of No No No Yes Yes business Receipt of orders from No No No Yes Yes customers Customer care No No No Yes Yes Merchandising and No No No Yes Yes procurement Packing No Yes No Yes Yes Shipping No Yes No Yes Yes Tracking of the No No No Yes Yes shipments Pricing of the products No No No Yes Yes Receipt of sales Yes No Yes No No consideration Generation and No No No Yes Yes preparation of the bills and invoices Maintenance of books Yes No Yes Yes Yes of account

other than receiving and sending money which was similar to banking sector,

for which not more than 2% to 3% would be charged as commission. He thus,

proposed to allocate profits of assessee and AE’s cumulated profits in the

hands of assessee. He then, split up combined profit, wherein out of total profit

of ₹ 157.23 crores earned over the years from assessment years 2007-08 to

2013-14, 97% was the profit allocated to assessee totalling ₹ 145 crores, to

which profit attributable to assessee which was equal to comparables profit was

added. The said table is reproduced hereunder for ready reference:

A.Y. Combined Profit % of Profit Profit AE’s Share Residual Profit Anagha’s Total of Anagha and earned by Attributable 3% allocated to Profit AE’s the to the Anagha Pharma Comparab Anagha Ltd. les. As which is per equal to the assessee’ comparable’ s T.P. s profit % Report A B C D (B*C%) E (B*3%) F (B-D-E) G (D+F) 2007-08 2,28,44,905 2.77 6,32,804 6,85,347 2,15,26,754 2,21,59,558 2008-09 17,69,90,270 0.31 5,48,670 53,09,708 17,11,31,892 17,16,80,562 2009-10 32,69,96,892 2.42 79,13,325 98,09,907 30,92,73,660 31,71,86,985 2010-11 8,81,15,771 4.35 38,33,036 26,43,473 8,16,39,262 8,54,72,298 2011-12 48,58,35,923 6.49 3,15,30,751 1,45,75,078 43,97,30,094 47,12,60,845 2012-13 13,32,70,295 5.71 76,09,734 39,98,109 12,16,62,452 12,92,72,186 2013-14 33,82,69,677 5.16 1,74,54,715 1,01,48,090 31,06,66,871 32,81,21,587 TOTAL 1,57,23,23,733 6,95,23,035 4,71,69,712 1,45,56,30,986 1,52,51,54,021

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which reads as under:

A.Y. Anagha’s Total Less O.P. Total Less Adjusted Net Adjt in the Profit shown by the adjustment in the hands hands of Anagha Assessee of Sava Pharma Ltd. Medica Ltd. (As mentioned below) A B C D E F 2007-08 2,21,59,558 1,30,38,449 91,21,109 0 91,21,109 2008-09 17,16,80,562 1,69,42,134 15,47,38,428 0 15,47,38,428 2009-10 31,71,86,985 4,55,81,486 27,16,05,499 0 27,16,05,499 2010-11 8,54,72,298 73,95,355 7,80,76,943 0 7,80,76,943 2011-12 47,12,60,845 1,66,56,860 45,46,03,985 94,92,109 44,51,11,876 2012-13 12,92,72,186 5,99,91,658 6,92,80,528 54,08,126 6,38,72,402 2013-14 32,81,21,587 4,78,94,987 28,02,26,600 4,66,98,148 23,35,28,452 TOTAL 1,52,51,54,021 20,75,00,929 1,31,76,53,092 6,15,98,483 1,25,60,54,609

₹ 91,21,109/-.

of the Act, completed assessment and issued draft assessment order for the

respective assessment years. The assessee filed objections before the

Dispute Resolution Panel (DRP) and proceedings started before the DRP

against order of Assessing Officer/TPO. After considering the facts of case and

submissions made by assessee, the DRP issued reference to the TPO vide

office letter dated 23.11.2016 to carry out certain examinations and report. The

first point which the TPO was asked to verify and report was the transaction of

supply of goods for Sava Medica Ltd., another concern of assessee which

came into existence from assessment year 2011-12. Vide para 6 of show

cause notice, the Panel observed that arm's length price of supply of goods

could not be determined by applying OP/OR of AEs as PLI. Therefore, the

TPO was to get the transactions of supply of goods to AE benchmarked

applying appropriate method and determine arm's length price of the

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transactions. In the case of assessee, the Panel noted the order of TPO, wherein it was mentioned that all functions except banking were done by assessee itself. In this regard, he was directed to examine assessments year-wise, various evidences available in his possession and identify the functions performed by different entities in each assessment year separately on the basis of such evidences. The next point noted by the Panel was the plea of assessee that it had supplied only about 30% to 35% of total purchases of Mauritius / Dubai based entities and the balance goods were procured by AE’s directly from other countries. The assessee had challenged the action of TPO in assessing entire profits of AE’s in its hands as incorrect and without prejudice it was submitted that even if the TPO’s view was correct, it had to be restricted to profits attributable to supplies made from India. The Panel directed the TPO first to examine the genuineness of claim of assessee that only 30% to 35% of total purchases of AE’s were from Indian entities. It further directed if the claim of assessee was found to be correct, then the TPO was to examine functions of assessee in respect of procurement by AE from countries other than India on the basis of evidence available with him. The TPO was directed to submit a report in this regard.

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TPO filed a report on the directions given by DRP. Then the TPO in the report first refuted the allegation of assessee that reference to TPO was made without presence of any feature given under section 92C(3) of the Act.

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most appropriate method. The objection of assessee that transaction not reported in Form 3CEB could not be benchmarked, was not accepted by the TPO. He further pointed out that neither the figures nor facts were imaginary as the figures were obtained from the financials and TP study report submitted by assessee. He acknowledged that the facts were gathered in a very long process search by the Investigation Wing, seizure of material, recording of statements, impounding of material analysis of statements recorded, appraisal report, etc. Rejecting the other objections of assessee, the TPO stated that the profits were allocated on the basis of FAR analysis, which were supported by the facts and figures. The AE's were allocated only 3% of profit according to its functions; all though AE's were proved to be sham entities. He acknowledged that Nonetheless, the AO has specifically been requested to bring even these 3% of the income of the AE's for taxation in India. Another objection of assessee was that the TPO had exceeded his powers in testing un-referred transactions. In this regard, reliance was placed on the ratio laid down in CIT Vs. Cushman & Weikfield India Pvt. Ltd. reported in 367 ITR 730 (Del) and Honda Motorcycle and Scooter Ind. Pvt. Ltd. Vs. DCIT reported in 46 CCH 459 (Del). In this connection, the TPO drew attention of the Panel to the newly inserted provisions of section 92CA(2B) of the Act w.e.f. 01.06.2012, which empowered the TPO to benchmark even those transactions, which were not referred to him. Various other issues were raised by assessee objecting to the transfer pricing and also the report of TPO, which we shall refer at the relevant time.

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that this was not transaction perse and at best it could be a ‘status’ but not a transaction. In such case, the whole jurisdiction assumed by the TPO was a failure as testing of control and management of AE parties was not prerogative of the TPO. It could be that of Assessing Officer from International Taxation Cell of IT Department, but in such case, the officer would be different, the assessee therein could be different. He further stated that the assessee was not challenging the right of TPO to benchmark such a transaction but control and management of AE entities was not a transaction. The assessee stressed that only technical point raised was such a POEM phenomenon was not an international transaction perse. It was further submitted that if this was part of international transaction, then there was no need for amendment to section 6(3) of the Act, since from the same fact of testing for POEM phenomenon could have been reached through TP proceedings. However, the Legislature in its wisdom has amended section 6(3) of the Act with heavy intent and purpose behind it, to rope in any sham entity. It was stressed that TPO’s action of testing POEM transaction was clearly contrary to the scheme of IT Act and contrary to the Legislative thinking. The assessee also filed elaborate submissions on each of the points to the remand report of TPO and replies given are reproduced in the order of DRP. The assessee also filed details of AE entities, employee cost which is available at page 87 of order of DRP.

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international transactions noted by him in the course of proceedings even if the said transactions were not referred to him by the Assessing Officer. Coming to the next plea raised by assessee that the TPO had tested an imaginary transaction of taxable profits of AE's in the hands of assessee on the ground that control and management of AE's exists with the assessee. It was further submitted by the assessee that taxing profits of AE's was not a transaction mentioned in section 92B of the Act and also process of testing the control and management of AE's was not the same as benchmarking of international transactions, in fact it was not a transaction at all and hence, could not be benchmarked. The assessee also argued that section 6(3) of the Act provides that an entity is resident of India if its place of effective management is situated wholly in India. The Panel also noted the arguments of assessee that the Legislative intent behind amendment of section 6(3) of the Act and introducing the concept of POEM gets defeated. The assessee had alleged that TPO in the garb of TP proceedings had invoked provisions of section 6(3) of the Act, which was also incorrect and unsustainable in law. It was further submitted by assessee that the Assessing Officer had referred to the TPO only various international transactions as contained in Form 3CEB for benchmarking. However, the TPO had proceeded to test altogether different transactions of taxing profits of AE's in the hands of assessee. Where the transaction of control and management of AE's and their profits was never referred to the TPO, process followed by TPO was bad in law. The next submission of assessee noted by the Panel was that of AE's in Singapore, Dubai and Mauritius were valid and genuine legal entities making all legal compliances. The TPO by making false conjectures had treated all the entities as sham and proceeded to lift corporate veil, which act was overreach by TPO. In fact, all the entities had strong commercial substance and were engaged in

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trading activities involving the global procurement, logistics, global marketing, etc.

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holds that from the benchmarking applying PSM done by TPO, we find that TPO has not benchmarked any transaction of control and management of the entire assessee group including the AE's lying with the assessee. Based on the evidence and submissions made, he has just held that the control and management of the entire group including the AE's is situated wholly in India and therefore it is a fit case to apply PSM to benchmark the transactions as no other method is found appropriate by TPO. The Panel thus, held that TPO has not determined the ALP of international transaction of control and management of AE's in India as argued. The TPO had benchmarked only the transactions reported and other inter-related and inseparable transactions found based on the evidence in his possession but not reported. Therefore, it was held that TPO had not tested any imaginary transaction or the transaction of control and management of AE's in India with the assessee.

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involving provisions of section 6(3) of the Act was assessable only in the hands of such company and it could not be assessed in the hands of another Indian company even if such Indian company was an AE of such foreign company. The Panel thus, held that the TPO had not recorded any such finding and reiterated that if the assessees were assessed to tax as if they are resident companies, the income of AE's from all sources would be assessable in their hands and not in the hands of assessee. Hence, the argument of assessee that order of TPO was in contradiction to the concept of POEM and provisions of section 6(3) of the Act were held to be misconceived and rejected. It was further held that TPO had not assessed the profits of AE's in the hands of assessee by holding them to be sham entities. On the other hand, the TPO had applied PSM method based on FAR analysis and attributed only 3% of global profits of the group to AE's and balance 97% of global profits were held assessable in the hands of Indian companies involved. Thus, the TPO had not only attributed profits to AE's but also admitted that they were performing certain functions. The Panel concluded by holding that the TPO has not held the AE's to be sham and the argument of assessee in this regard was held to be ill-conceived and rejected. Another finding of Panel in para 5.3.1.2 was From the financials of the assessee and AEs as submitted, we find that both assessee and AEs have incurred significant costs on employees and other administrative costs. Looking at the details of accounts of salary and other indirect expenses, assets, etc. of assessee in INR and AE's in their respective foreign currencies, which were submitted by assessee in tabulated form, which are reproduced under para 10.2.8 at pages 186 and 187 of order of DRP; the Panel noted the argument of assessee that AE's were incurring substantial expenses on salaries and other indirect expenses and the said expenses as proportionate to sales, in case of AE's were substantially higher.

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Further, the AE's were holding substantial assets. The AE's had also entered into several agreements for supply of products as per orders. Therefore, the AE's could not be declared as merely paper entities or sham as done by TPO. Further, the assessee pointed out that AE's had chosen the business model of outsourcing their operations; accordingly, AE's have appointed DHL at Singapore for dispatching the orders and Sava Infotech Ltd. in India for processing the orders, etc. Hence, merely because AE's have outsourced its functions, it could not be held as sham since they require less manpower for functioning. Vide para 10.3 onwards, the Panel holds that after considering various arguments, annual reports of AE entities, the discussion in TPO order, the role of AE's in the business model of assessee and also various assets held by them, they were of the view that entities could not be held as sham, they have to be held as genuine legal entities engaged in the business. It was further elaborated that the object of TPO in calling such entities as sham appeared to be on the ground that they could not do necessary functions as required for the business activities claimed and most of the functions on their behalf were held to be carried out in India by Sava group. For this reason, the TPO held that they were doing only banking functions and attributed 3% of global profits of group to AE's. The Panel thus, held for this reason alone, it can be concluded that the TPO himself is not holding such entities to be sham. He also held them to genuine legal entities. The TPO on the other hand, had held that control and management of such entities was situated wholly in India. Reference was then made to order of Settlement Commission in the case of Shri Vinod Jadhav, in whose hands the global profits of Sava group including foreign entities was sought to be taxed; then vide order dated 20.03.2014, the Settlement Commission held that we are of the considered view that on the basis of evidences presented before us, the

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profits of foreign entities belonging to Sava group cannot be brought to tax in the hands of applicant. The DRP thus, vide para 10.3.4 concluded as under:- ―10.3.4 Considering all the above, we hereby hold that AE's based on facts on record as discussed by TPO, cannot be held as sham. They are therefore held as genuine legal entities. The issue of attribution of profits in their hands @ 3% of the global profits of Sava group shall be decided in subsequent paragraphs while deciding the benchmarking of international transactions. These grounds are therefore decided accordingly.‖

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He then, pointed out that first issue which needs to be addressed is can reference be made to TPO and second issue was whether where the TPO says everything was sham and he lifted the corporate veil, then the question was whether the TPO could go into it. He stressed that if everything was sham, then the TPO has no jurisdiction under section 92CA of the Act. Referring to order of DRP, it was pointed out that DRP in the first instance says that AE's were not sham; but goes on to say that assessee must have given everything to them and / or provided services to AE's. The reasoning for this by the DRP was that Shri Vinod Jadhav was the employee of assessee. It was pointed out that 69% of global profits were added in assessee’s hands and 30% of global profits were added in AE's hands. He explained that in any case large part of profits have travelled back to India as dividend and salary to Shri Vinod Jadhav and same were offered to taxes @ 15%. He pointed out that the question was attribution of profits to Sava Healthcare Ltd and Sava Medica Ltd., but the DRP did not allow an application made under section 154 of the Act. Our attention was drawn to the issue raised vide ground of appeal No.3.1, wherein earlier satisfaction dated 23.05.2014 and 18.07.2014 of Revenue was that entire global profits were that of Shri Vinod Jadhav. However, the finding of Settlement Commission vide order dated 27.08.2015 was that it was not to be taxed in the hands of Shri Vinod Jadhav. He then pointed out that second satisfaction by Revenue dated 16.12.2015, where the entities were shell companies and were formed for tax evasion. The Ld. AR stressed that where matter has to be referred to TPO for benchmarking international transactions, there are some operative ‘words’ in the mechanism, which have some bearing. The learned Authorized Representative for the assessee stressed that even under the provisions of section 92CA(1) of the Act, it was incumbent upon Assessing Officer to give show cause notice to assessee before making

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reference to TPO. The Ld. AR then placed reliance on the decision of the Hon’ble Bombay High Court in Vodafone India Services Pvt. Ltd. Vs. Union of India reported in 39 taxmann.com 201 (Bom). He also placed reliance on CBDT Instruction No.3/2016, dated 10.03.2016 placed at pages 1443 to 1450 of Paper Book-4. On the basis of decision of the Hon’ble Bombay High Court and CBDT Instruction, he then pointed out the instances where cases have to be referred by Assessing Officer to the TPO and the objection raised by assessee in this regard was that the Assessing Officer must provide an opportunity of being heard to taxpayer before recording his satisfaction or otherwise, for making reference to TPO. He then referred to provisions of section 92C(3) of the Act and proviso thereunder and also the amended law w.e.f. 01.06.2007 in section 92CA(4) of the Act. He stressed that after amendment, the word used is ‘in conformity’, whereas in pre-amended provisions, expression used was ‘having regard’. The Ld. AR pointed out that appeals in the case of assessee are from assessment year 2007-08 onwards, hence amended provisions are applicable.

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services, was correct or not. However, the TPO went beyond his powers and came to a finding that 97% of world’s profits were to be taxed in India. He then, referred to the ratio laid down by the Hon’ble High Court of Delhi in Indorama Synthetics (India) Ltd. Vs. ACIT (2016) 386 ITR 665 (Del). He stressed that the Hon’ble High court has laid down that in the absence of any audit report in Form 3CEB and where the assessee does not claim the transactions to be international transactions, then sections 92C(3) and 92C(4) of the Act come into play and the Assessing Officer is duty bound to give opportunity. Reference was also made to CBDT clarification of 2016. Thereafter, reliance was placed on the decision of Hon’ble High Court of Calcutta in PCM Strescon Overseas Ventures Ltd. Vs. DCIT (2017) 85 taxmann.com 165 (Cal) and Mumbai Bench of Tribunal in Videocon Oil Ventures Ltd. Vs. DCIT in ITA No.6630/Mum/2016, relating to assessment year 2012-13, order dated 20.09.2017. The Ld. AR explained that the assessee was making purchase of goods from India and the same were exported to Mauritius in the first year and to UAE thereafter. Our attention was drawn to news report of January, 2016, wherein it was reported that in India, there cannot be any sale of drugs online. In December, 2018, the Hon’ble High Court of Madras had banned online sale of drugs in India. Referring to the order of TPO especially in para 27.3 wherein 97% of world profits had been attributed to assessee, he pointed out that the TPO at page 84 had carried out FAR analysis of entire transactions on the ground that entire control of business was in India and the TPO has also held that all the transactions are sham transactions. Further, the AE's have been held to be shell companies as the AE's were only paying godown rent. Another aspect noted by TPO was the employee cost of Dubai and Mauritius companies and the TPO then goes on to lift corporate veil and after perusing, he holds that PSM method was most appropriate method and he has carried out

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quantification accordingly. Referring to the order of TPO, he points out that it has been held that control and management of business was in India and for holistic approach, he says all control in India. Referring to amendment to section 6 of the Act w.e.f. assessment year 2015-16, the Ld. AR pointed out that it now defined the effective control and management of company. In the pre-amended section 6(3) of the Act, talk was of complete control and management of affairs in India, whereas now law w.e.f. 01.04.2017 talks of effective place of management and the Explanation thereunder defines POEM. He stressed that amendment is w.e.f. 01.04.2017 and in earlier regime the definition was at variance. According to TPO, all control and management in India and all AE's are shell companies, so he wants to take route of control and management of affairs in India but in such scenario, where whole control and management was in India, where is the need to apply transfer pricing provisions. The Ld. AR stressed that whether wholly and completely the control was in India was the ‘status’ of assessee, which could be under section 6 of the Act and not by the TPO under the TP provisions. He pointed out that the TPO has time and again referred to the evidences collected by investigation wing and also investigation carried on by them. Then, the Assessing Officer could have acted himself and found out whether control was in India; but by giving mandate to the TPO, the Assessing Officer acted wrongfully and the same is fatal to the whole mechanism of completing assessment in the hands of assessee.

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Jadhav and then they held the same were taxable in the hands of assessee company. Our attention was drawn to chart placed at page 1431 of Paper Book and it was pointed out that search action was carried out on Sava group on 31.10.2012, notice under section 153A of the Act was issued to the assessee company on 15.05.2013. However, on 23.05.2014 satisfaction of Assessing Officer was that Shri Vinod Jadhav was the main person behind all foreign entities and unless the profits of foreign entities are included in settlement application, the same cannot be true and complete. On 18.07.2014 also, similar satisfaction of Assessing Officer that profits of foreign entities are to be included in settlement application of Shri Vinod Jadhav was part of report passed in the case of Shri Vinod Jadhav before the Settlement Commission. On 28.09.2014, case was referred to TPO after approval of the Commissioner. On 27.08.2015 in the settlement proceedings, the findings of Settlement Commission are that profits of foreign entities could not be taxed in the hands of Shri Vinod Jadhav. However, Income Tax Department was free to take appropriate action as per section 6(3) of the Act, which was amended by Finance Act, 2015 with respect to POEM; copy of said order of Settlement Commission is placed at page 1399 of Paper Book. He then refers to the findings of TPO on 29.01.2016 to the effect that entire business model was the brainchild of Shri Vinod Jadhav. He also referred to another proceeding in the case of Sava Pvt. Ltd., wherein also the TPO was of the view that entire development of software and its maintenance and operations were managed and controlled by Shri Vinod Jadhav and the employees of Sava Pvt. Ltd. However, on 29.01.2016, the Assessing Officer, Incharge of the assessee company holds that entire operations were managed by the assessee and he comes to a finding that entire global operations were carried out by Pune based companies of Sava group. He stressed that the order of TPO in holding AE

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entities to be sham is not correct as they were genuine, legal entities. Coming to the order of DRP, it was pointed out by the Ld. AR that it is held by the Panel that control and management of the affairs of business was not an issue decided. He then, drew our attention to submissions made before the DRP by the assessee to prove that AEs were not sham and then referring to the order of DRP, it was pointed out that all the case laws which are relied upon in paras 4.1 and 4.2 at page 95 relate to the period prior to assessment year 2006-07 except case law in the case of Headstrong Services India Pvt. Ltd. (TS-45- ITAT-2016(Del)-TP). He stressed that after amendment to section 92C(3) of the Act, the Assessing Officer had to pass order in conformity with the said provisions. The said case of the Hon’ble Bombay High Court in Vodafone India Services Pvt. Ltd. (supra) was cited before the DRP, but the same was not referred. He then drew our attention to the ratio laid down in Sony India (P.) Ltd. Vs. CBDT & Anr. (2007) 288 ITR 52 (Del), which is a case explaining the situation prior to 2007 and meaning of expression ‘having regard’ has been explained. He stressed that after the amendment in 2007, law says that the Assessing Officer is bound to accept the TPO’s order. So, it is all the more necessary that before making reference to the TPO, the Assessing Officer should issue show cause notice to assessee, so that the assessee can put its case whether any benchmarking of the transactions are required or not. He then, said that DRP concluded by holding that the AEs were not sham, however, Profit Split Method was applied and an upward adjustment was made in the hands of assessee.

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Act are to be applied when TPO is making TP analysis; so section itself is not applicable to the facts of the case. Referring to the arguments of Ld. AR that no satisfaction was recorded by the Assessing Officer and if satisfaction is recorded, then not correctly recorded, she referred to Audit Report in form No.3CEB for all the years and pointed out that reference was made on the basis of reporting made by the assessee. Our attention was drawn to reference by Assessing Officer to the TPO dated 16.12.2013 for assessment years 2008- 09 to 2011-12, wherein the Assessing Officer has recorded satisfaction. She also filed copy of Reference Note of Assessing Officer, under which TPO was asked to benchmark the international transactions. She stressed that reference by Assessing Officer to TPO was with respect to transactions which were reported by assessee in its audit report. Our attention was drawn to audit reports for each of the years in this regard and the transactions which were referred in the reference letter of the Assessing Officer. The CIT-DR further pointed out that the question whether for making reference, the Assessing Officer has reported transactions with profit or income element. Referring to decision of the Hon’ble Bombay High Court in the case of Vodafone India Services Pvt. Ltd. (supra) with special reference to para 32, she pointed out that the said decision was very specific on its facts, where qualifying remarks were given in para 5. In the present case, however, the TPO makes FAR analysis and in the course of FAR analysis, he can look into any aspect of international transaction. It was stressed by her that whether the assessee is doing business legally or illegally, that aspect has no meaning as income is to be assessed in the hands of assessee. It was stressed by her that there is no requirement that the Assessing Officer to record satisfaction or give any opportunity of hearing to the assessee.

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management of affairs of business and findings of TPO in this regard were referred at pages 73 to 76 of TPO order. The Ld. DR placed reliance on the decisions in DIT (IT) Vs. Morgan Stanley & Co. Inc. (2007) 292 ITR 416 (SC), Pepsico India Holdings Pvt. Ltd. & Anr. Vs. Addl.CIT & Anr. (2019) 197 TTJ 393 (Del) and Google India Pvt. Ltd. & Ors. Vs. Jt.DIT (IT) & Ors. (2018) 194 TTJ 385 (Bang). The Ld. DR stressed that TPO had carried out FAR analysis of transaction which was a very important part of TP analysis and it is wrong to say and vide para 15 of written note, it is stressed that, the TPO had not benchmarked any transaction of control and management, but had conducted FAR analysis, which could be carried out by him, as held by Hyderabad Bench of Tribunal in Euroflex Transmissions India Pvt. Ltd. & Anr. Vs. Addl.CIT & Anr. (2016) 48 CCH 190 HydTrib.

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The Ld. AR raised the issue of non satisfaction of conditions laid down in section 92CA(1) of the Act, for which he stated that already submissions have been made and reference has been made to the decisions in the case of in Vodafone India Services Pvt. Ltd. (supra) and in Indorama Synthetics (India) Ltd. Vs. ACIT (supra). He pleaded that the said ground needs to be decided and arises in addition to grounds raised challenging exercise of jurisdiction by the Assessing Officer under section 92C(3) of the Act. In this regard, he stated that said issue is raised in line with Rule 11 of Income Tax (Appellate Tribunal) Rules, 1963.

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go to decide control and management of business of AEs while benchmarking international transactions of export of traded goods by assessee. In this regard, again reliance was placed on the ratio laid down by the Hon’ble High Court of Delhi in CIT Vs. Cushman and Wakefield (India) (P.) Ltd. (2014) 367 ITR 730 (Del). The Ld. AR then refers to Circular of 2016 and whether it is prospective or not. He points out that the Ld. DR has placed reliance on the ratio laid down by Delhi Bench of Tribunal in Louis Vuitton India Retail (P.) Ltd. Vs. DCIT (2017) 80 taxmann.com 32 (Delhi-Trib.), wherein it has been held that Instruction No.3/2016 was prospective. The Ld. AR in this regard pointed out that Tribunal in the said case was looking at jurisdiction of TPO and whether the same was confined to international transactions referred to him by Assessing Officer for determination of arm's length price or whether such jurisdiction was extendable to other international transactions which come to his notice during the course of proceedings before him. He stressed that the said ratio was contrary to the view in the case of Vodafone India Services Pvt. Ltd. (supra) with special reference to paras 44 and 45, wherein it has been held that it was the obligation of Assessing Officer to follow the principles of natural justice as read into section 92(A)(1) of the Act, because once the Assessing Officer refers the transactions to TPO, he will be bound to act in conformity with the order of TPO as mandated by section 92CA(4) of the Act. The Ld. AR referred to Instruction No.3/2003, dated 20.05.2013, which is under old scheme, copy of which is placed at pages 1432 to 1434 of Paper Book, wherein also the Assessing Officer was obliged to give formal opportunity to the taxpayer on receipt of TPO’s order. Then, he referred to Instruction No.15/2015, dated 16.10.2015 placed at pages 1435 to 1441 of Paper Book-4, wherein it is provided that the Assessing Officer has to compute total income of assessee under section 92C(4) r.w.s. 92CA(4) of the Act in conformity with

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arm's length price determined by TPO. Then, our attention was drawn to Instruction No.3/2016, dated 10.03.2016, wherein it is clearly provided that the Assessing Officer has to provide an opportunity of being heard to the taxpayer before recording his satisfaction in three situations mentioned in the said Circular i.e. before making reference to the TPO. In this regard, the Ld. AR referred to decision in Indorama Synthetics (India) Ltd. Vs. ACIT (supra), wherein the Hon’ble Delhi High Court says that the said Circular of 2016 is retrospective. However, it was pointed to the Ld. AR that the Delhi Bench of Tribunal in Louis Vuitton India Retail (P.) Ltd. Vs. DCIT (supra) has held the said Circular to be prospective. In this regard, he stressed that dictate of the Hon’ble Bombay High Court in the case of Vodafone India Services Pvt. Ltd. (supra) is exact opposite. Referring to the letter of Assessing Officer, under which reference was made to the TPO, he says that in the said letter itself reference goes beyond the reported transactions and in fact artificial transactions were referred to the TPO. He stressed that the TPO cannot decide this issue and at best it could be referred for international taxation.

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the Assessing Officer (International Taxation) and not with the Assessing Officer, Central Circle. Referring to rule 10B(d) of Income Tax Rules, 1962 i.e. Profit Split Method, it was pointed out that as per clause (2) / (ii), after FAR and on the basis of reliable external market data, how such contribution could be evaluated and added in the hands of assessee. He then, referred to powers of DRP under section 144C of the Act and sub-sections (5), (6), (7) and (8) and referred to enhancement powers of DRP. In this regard, he drew simile to the powers of CIT(A) under section 251(2) of the Act of enhancement, wherein Explanation clearly provides that enhancement can be made with regard to any matter arising out of proceedings i.e. any matter relating to assessment. In this regard, the Ld. AR stressed that powers of DRP were lesser than that of CIT(A), wherein the CIT(A) can look into any matter but the DRP to look into enhancement or variation of adjustment but not any new issue. For this, he placed reliance on the decision in Munjal Showa Ltd. Vs. DCIT (2016) 382 ITR 555 (Del). The Ld. AR here stressed that powers of enhancement of CIT(A) were wider than powers of DRP; if the CIT(A) cannot do something, then the DRP cannot venture into something new, which the Assessing Officer has not even gone into. Referring to the order of TPO, he pointed out that it was held that global profits were to be benchmarked and for which the TPO did not apply any of the traditional methods. He artificially lifted corporate veil and made the adjustment, so where the TPO has not benchmarked the transaction by any of the prescribed methods, then the DRP cannot go into the aspect of application of any method. In any case, transactional analysis by the DRP is different, so which is beyond its power and cannot be upheld. Rationale of case laws vis-a- vis powers of CIT(A), the Ld. AR referred to written note filed at pages 1420 to 1424 of Paper Book-4 and also placed reliance on the following case laws:-

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a) Vijay Arjundas Luthra Vs. DCIT in ITA Nos.535/PUN/2013 & 1354/PUN/2016, relating to assessment years 2004-05 & 2005-06 and ITA No.21/PUN/2015, relating to assessment year 2004-05, order dated 16.08.2017 b) CIT Vs. Shapoorji Pallonji Mistry (1962) 44 ITR 891 (SC) c) CIT Vs. Rai Bahadur Hardutroy Motilal Chamaria (1967) 66 ITR 443 (SC) d) DCIT Vs. Sandvik Information Technology AB (2017) 80 taxmann.com 295 (Pune-Trib.)

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very clearly observed by TPO that control and management of all companies was in India; so the TPO attempted to benchmark the transactions which were otherwise not reported in form No.3CEB. In last few lines of para, the TPO hold that AEs were proven to be sham. The Ld. AR here stressed that, be that as may, the DRP has given a finding that AEs are not sham at page 187 of DRP’s order starting from para 10.3.1 with finding in para 10.3.4. On the other hand, he points out that TPO in substance hold that all control and management was in India, so applies provisions of section 6(3) of the Act. He does talk of Profit Split Method but in true sense not applied it as all control and management was in India. Further, the TPO has not gone into transaction of attribution of profits to AEs as he taxed 97% of world profits in the hands of assessee and asked the Assessing Officer to tax balance 3% in the hands of assessee. Now, the DRP in such circumstances, cannot go enlarge findings. The Ld. AR pointed out that by amendment to section 6(3) of the Act, the Statute has intended to bring to tax profits of shell companies, on the basis of control and management theory. He stressed that if under the existing provisions of the Act, such a remedy was already available to the Revenue authorities i.e. by route of TPO, where was the need to introduce amendment to section 6(3) of the Act. He again referred to Circular at page 1588 of Paper Book-4, under which POEM was introduced. He stressed that where the TPO had not applied any TP method, especially when he says management and control in India and hence, profits of entities to be taxed in India, so, where no exercise of application of any method by the TPO, then DRP in such circumstances, cannot assume jurisdiction.

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was the role of DRP to benchmark export of medicine, but it goes on to decide provision of services. He stressed that DRP could not find enabled source of income i.e. added services of provision of services to export trading of medicine. It was case of Ld. AR that DRP can look into what the Assessing Officer or TPO had done. In this regard, he drew an example that in case Assessing Officer/TPO had looked into A, B and C aspects and whether in part or not, any of the aspects the DRP had power to look into them; but not anything under them i.e. provision of added services. Referring to decision in the case of Vodafone India Services Pvt. Ltd. (supra), it has been pointed out that the Hon’ble High Court had equated powers of DRP with CIT(A) and when CIT(A) was precluded to look into new items of income / expenditure, then no power in this regard can be exercised by the DRP. Reliance in this regard was placed on the decision in the case of ITO Vs. Smt. Nirmala Vijay Sanklecha in ITA Nos.1937/PUN/2016, ITO Vs. Smt. Nirmala Prakash Shah in ITA No.1938/PUN/2016 and CO Nos.35 & 36/PUN/2016, relating to assessment year 2008-09, order dated 23.02.2018. He concluded by saying that when traditional transactions were not included into by the TPO, then the DRP could not go into the same.

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referred to Circular No.3/2016, dated 10.03.2016 which postulates a speaking order in such circumstances. The Ld. AR stressed that if there was violation of principles of natural justice, then it was an error which cannot be cured. Relying on the decision in the case of Videocon Oil Ventures Ltd. Vs. DCIT in ITA No.6630/Mum/2016, relating to assessment year 2012-13, order dated 20.09.2017, he pointed out that assessment order in such circumstances was to be struck down. At the close of hearing, it was pointed out that the TPO had applied simultaneous approach to the transactions of both the assessee and also Sava Medica Ltd. and at the end attributed some parts of profits to Sava Medica Ltd. We have heard the parties up to ground of appeal No.4 being the jurisdictional issue.

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letter dated 28.09.2014. The said reference was made under section 92CA(1) of the Act for the purpose of determination of arm's length price of international transactions. Thereafter, another notice under section 142(1) of the Act, dated 28.07.2015 was issued due to change in incumbent along with detailed questionnaire and other notices on various dates, which were attended by assessee and necessary details and documents were filed. The TPO in the proceedings under section 92CA of the Act received jurisdiction order passed by JCIT (TP) Range-1, Pune, dated 14.07.2015. Notice under section 92CA(2) of the Act was issued to assessee on 17.07.2015, in response to which the assessee attended and TP proceedings were carried on. Before going into the details of TP proceedings and findings of TPO and the order passed under section 92CA(3)(1) of the Act, we deem it necessary to refer to certain events which have taken place from the date of search till the start of TP proceedings in the case of assessee i.e. between 31.10.2012 to 17.09.2014 when the approval was received from the Commissioner and the TPO issued notice under section 92CA(1) of the Act, dated 28.09.2014.

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services, web development services and IT support services. Thereafter, the assessee acquires in financial year 2010-11 an independent concern M/s. Biodeal Laboratories Pvt. Ltd., which was a manufacturing and trading concern. One concern Sava Pharma Ltd. was incorporated on 02.11.2011 which was also engaged in manufacturing, buying and selling, importing of pharma products.

Sr.No. Date Events 36 03-08-12 Summons u/s 131(1A) to Mr. Vinod Jadhav promoter of assessee along with detailed questionnaire by DDIT(Inv), Pune 1st Reply to Summon submitting 37 21-08-12 - Brief note on business activity & associated companies - Other personal details 38 12-10-12 Summons u/s 131(1A) to Mr. Jadhav promoter of assessee along with detailed questionnaire by DDIT(Inv), Pune 2nd Reply to Summon 39 17-10-12 3rd Reply to Summon 40 18-10-12 41 22-10-12 Statement recorded u/s 131(1)(b) by DDIT(Inv) of Mr. Jadhav 4th Reply to Summon explaining 42 23-10-12 - Boideal Acquisition Transaction - Details of Foreign companies 5th Reply to Summon explaining business model 43 25-10-12 of SAVA group 6th Reply to summon 44 29-10-12 - Summary of submissions till date - Submission of Audited Financials of foreign co - Brief about trading operating at foreign companies 7th Reply to summon 45 30-10-12

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Search Sr.No. Date Events 46 31-10-12 Statement recorded u/s 132(4) of Mr. Jadhav 47 01-11-12 Statement recorded u/s 132(4) of Mr. Jadhav 48 06-11-12 Statement recorded u/s 131 by DDIT(Inv) of Mr. & Jadhav 07-11-12 49 27-12-12 Retraction of declaration made u/s 131 to DDIT(Inv) 50 27-12-12 Submission to DDIT(Inv) retracting declaration

Post – Search Sr.No. Date Events 51 05-03-13 Enquiry u/s 131 in case of Bytzsoft Technologies Pvt. Ltd. (BTPL) Impounded Material replied upon a) Screenshot of Software (Annexure A of TP order) b) Sample Copies of email communication out of set of 375 emails impounded (Annexure F of TP order) c) Statements of employees of BTPL - Yousuf Saifee owner of BTPL - Yousuf Saifee owner of BTPL d) Loose bundles impounded 52 28-03-13 Survey action at Balasai Net Pvt. Ltd. by DDIT(Inv) Loose papers Email communications (Annexure B of TP order) Email communications (Annexure E of TP order) 53 28-03-13 Survey action at Tata Communication Pvt. Ltd. 54 03-04-13 Statement of employee of Sava Private Ltd. 19-04-13 (Group Concern) a) Vikram Taware along with emails b) Ravindra Dasarwar c) Sample Email communications (Annexure D of TP order) 55 22-04-13 Statement Recorded u/s 131 by DDIT(Inv), Pune of Mr. Vinod Jadhav Invoices raised by AE on Third party (Annexure C of TP Order)

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under dispute and in response to notice issued under section 153A of the Act, the same income has been disclosed.

―No.Pn/DCIT 2(1)/2013-14/TPO/1213 Date: 16/12/2013 To The Director of Income Tax (Transfer Pricing & I.T) Pune Sir, SUB: - Reference to Transfer Pricing Officer for determining the Arm Length Price in the case of Anagha Pharma Pvt. Ltd. Ref: - The CIT(C) Pune’s letter No.Pn/CIT(C)/Transfer Pricing/2013- 14/4259 dated 14.11.2013 ****** Kindly refer to the above. 02. A search and seizure action in various premises of the SAVA group of cases was conducted by Dy. Director of Income Tax (Inv), Unit 1(2), Pune on 31/10/2012. The above mentioned assessee is a part of that group. 03. Perusal of the appraisal report suggests that the transactions investigated are cross border transactions amongst various Associated Enterprises of this assessee group. Major business of this group is supplying drugs and medicines to the on-line pharmacies and customers of on-line pharmacies in different countries and particularly those in North America. For this purpose, the assessee group had floated a company which goes by various names like Sava Trading FZC, Sava Trading FZE, Goldwings Trading FZE, Westside Trading FZE etc., in Sharjah Airport International Free Zone (SAIF), Sharjah, UAE. 04. Investigation into the affairs of these companies have revealed that the assessee group is selling the medicines and drugs from India to the customers in various parts of the world using the route of Singapore and Mauritius for the purpose of packing the products. The proceeds of sale of such products are received in the bank account of companies registered in Sharjah, UAE. All of such sales to customers in various countries are artificially shown to be made by UAE based companies and income is shown to be earned by UAE based companies. This is done in order to not to pay taxes on the huge profits earned in this business which are received in UAE. Such huge profits are repatriated by the Promoter of the group Shri Vinod Jadhav in the guise of salaries,

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commissions etc., and he has claimed the same as exempt by claiming himself to be a non-resident India (NRI) for F.Y. 2009-10. 05. The modus operandi of the group adopted for this purpose is unearthed through various evidences and statements of various persons. This is detailed in Chapter-6 of the Appraisal Report from page 66 to 127. The Addl. DIT(Inv), Unit-1, Pune in his letter enclosed with the Appraisal Report, has suggested in para 10 that cases of this group may be referred to the Transfer Pricing Officer. Analysis of the findings of the transaction of this group companies with their Associated Enterprises in UAE, Singapore and Mauritius also make it imperative that these cases should be referred to the Transfer Pricing Officer. The detailed justification for the same also forms the part of the Appraisal Report, a copy of the Appraisal Report is enclosed for your kind reference. 06. The transaction of domestic company namely, M/s. Anagha Pharma Pvt. Ltd. with the associated enterprises are shown in the Audit Report in form 3CEB which are as follows for various years: Assessment Year Amount of transaction (Amt. in crores) 2008-09 12.85 2009-10 17.84 2010-11 18.38 2011-12 22.68 Copies of form No.3CEB are attached for your reference 07. The CIT(C), Pune vide his letter dated 14.11.2013 has accorded the necessary approval to refer the above case to T.P.O. Pune. (Copy enclosed) 08. In view of the above, the undersigned is forwarding the cases for determination of the Arm Length Price in this case.

Yours faithfully, Sd/- (SUDHA GUPTA) Dy. Commissioner of Income Tax Central Circle 2(1), Pune

Copy to: 1. The CIT Central, Pune 2. The Jt. CIT, CR-1, Pune

Dy. Commissioner of Income Tax Central Circle 2(1), Pune

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into affairs of assessee group and suggestion of Addl.DIT(Inv) Unit-I, Pune vide para 10 of his letter to make reference to TPO, was of the view that case needs to be referred to TPO for the analysis of findings of transactions of the group companies with their AEs in UAE, Singapore and Mauritius. The said reference was based on the appraisal report of investigation wing, copy of which was also forwarded to the TPO. Vide paras 3 to 5, the Assessing Officer talks about investigation in the case, modus operandi and justification for reference to the TPO. In para 6, the Assessing Officer refers to the transaction of assessee with its AEs as shown in audit report in form No.3CEB. Undisputedly, the amount of transaction is what was reported in form No.3CEB filed by assessee and copy of the same has been forwarded to the TPO.

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application, the same cannot be said to be true and complete. In this regard, reference is made to para 4.1 of the order passed under section 245D(2)(c) of the Act passed in the case of Shri Vinod Jadhav, copy of which is placed at page 1333 of Paper Book and under rule 9 of Income-tax Settlement Commission (Procedure Rules), report of the Commissioner of Income-tax (Central). Vide para 3, it was alleged that application of applicant may be treated as invalid application as it did not contain a full and true disclosure of his income. The said report is placed at pages 1346 onwards of Paper Book with special reference to page 1348. Further, while passing order under section 245D(4), dated 27.08.2015 in the case of Shri Vinod Jadhav, the Settlement Commission vide para 8 refers to the arguments of CIT-DR on the issue of control, management and functioning of foreign entities and bringing to tax global profits of Sava group to be taxed in the hands of appellant (Vinod Jadhav). The contention of assessee was that all foreign entities were independent, corporate entities in complete legal compliance of concerned jurisdiction, as regards preparing accounts, filing reports, paying taxes as per applicable laws. It was further stressed that global pharma activities (e- pharmacy business) could not be done in India due to restrictions as explained in the settlement application. The Settlement Commission held that after considering the facts of case as well as arguments advanced on both sides, they were of considered view that on the basis of evidences presented before us, the profits of foreign entities belonging to Sava group cannot be brought to tax in the hands of applicant.

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the profits of foreign entities in the Settlement Application, the same was not

true and complete. The said issue was decided by Settlement Commission

vide its order dated 27.08.2015; but simultaneously the Revenue authorities

also initiated proceedings in the case of assessee on the ground that the affairs

of foreign companies have also to be looked in by the TPO, for which reference

was made by the Assessing Officer, Incharge of assessee company vide two

separate letters dated 16.12.2013 and 28.09.2014. It may be pointed out that

the TPO has vide paras 18 and 18.7.7 stated that the entire business model

was brainchild of Shri Vinod Jadhav. Further, in para 18.12 of TPO’s order, it

has been mentioned that entire operations were managed by assessee

company; and also entire development of software and its maintenance and

operations were managed and controlled by Shri Vinod Jadhav and employees

of Sava Pvt. Ltd. This is the premise on which the TP proceedings were

initiated, carried out and finalized in the case of assessee. The TPO in the final

analysis has held that control and management of business is with the

assessee company in Pune and hence, 97% of profits are to be taxed in its

hands and he has also directed the Assessing Officer to tax balance 3% in the

hands of assessee. The TPO has passed order under section 92CA(3) of the

Act proposing an upward adjustment of ₹ 91,21,101/- in assessment year 2007-

08 and in entirety, he has proposed the additions as under over the period of

153A proceedings:-

A.Y. Date of filing Returned Gross Value TP Other addition Total income of return u/s income as per of adjustments u/s 14A (in assessed (in 139 draft order (in International made (in INR) INR) INR) INR) transactions as in Form 3CEB (in INR) 2007-08 30-10-2007 1,16,95,864/- 7,73,67,713/- 91,21,109/- 16,387/- 2,08,33,360/- 2008-09 30-09-2008 1,59,69,100/- 11,82,68,790/- 15,47,38,428/- 26,128/- 17,07,33,660/- 2009-10 15-10-2009 4,03,29,350/- 17,84,50,128/- 27,16,05,499/- 35,125/- 31,19,69,974/- 2010-11 15-10-2010 5,84,95,250/- 18,38,34,713/- 7,80,76,943/- Nil 13,65,72,193/- 2011-12 29-11-2011 2,57,97,043/- 22,68,79,029/- 44,51,11,876/- 1,79,290/- 47,10,88,210/- 2012-13 26-08-2013 6,40,91,200/- 33,84,09,581/- 6,38,72,402/- 2,53,060/- 12,82,16,662/- 2013-14 30-11-2013 4,34,03,670/- 35,16,85,750/- 23,35,28,452/- 2,07,007/- 27,71,39,029/-

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Sava Healthcare Ltd.; thus, it constitutes PE of assessee in India. Therefore, the profit attributable to PE is taxable income of foreign company in the hands of PE through Sava Healthcare Ltd. and its various employees. Referring to income as per Profit and Loss Account and assets held, both fixed and current, by AEs in Singapore, Dubai and Mauritius by different concerns in assessment years 2007-08 to 2013-14, the DCIT records reason to believe that income of Anam Trading Pte Ltd. attributable to its PE through Sava Healthcare Ltd. and employees of various group companies in India for assessment year 2011-12 was beyond the prescribed amount and had escaped assessment and notice under section 148 of the Act has been issued.

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or class of transactions, etc. Sub-section (2) lays down that most appropriate method shall be applied for determination of arm's length price in the manner as may be prescribed. Sub-section (3) lays down that where during the course of any proceedings for assessment of income, the Assessing Officer on the basis of material or information or documents in his possession, was of the opinion that either of conditions laid down in clauses (a) to (d) are not specified, then the Assessing Officer may proceed to determine arm's length price in relation to said international transaction in accordance with sub-sections (1) and (2) on the basis of material, information or documents available with him. The proviso thereunder lays down that an opportunity shall be given by the Assessing Officer by serving notice and called upon the assessee to show cause why arm's length price should not be so determined on the basis of material / information / documents in his possession. Under sub-section (4), where arm's length price is so determined by Assessing Officer, then he is to compute total income of assessee having regard to the same. This is the proceeding which has to be carried on by the Assessing Officer while determining arm's length price of international transaction. The said exercise of powers by Assessing Officer to determine arm's length price of international transaction takes place in cases having a certain value of international transaction, which is prescribed as per instructions of Revenue. Under section 92C(3) of the Act and proviso thereunder, the Assessing Officer who exercised the power of computing ALP of international transaction of an assessee has to give show cause notice to the assessee before determining ALP in his hands to the effect that why ALP should not be determined in his hands. So, the first step is for the Assessing Officer to give show cause notice to the assessee as to why transfer pricing proceedings should not be initiated in his case and thereafter, the Assessing Officer is to proceed to determine ALP of international

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transaction and pass consequent order thereto. In other words, a safeguard is provided under the Act itself where the Assessing Officer exercises the power to determine ALP of international transactions in the given circumstances. The Revenue has time and again announced value of international transactions, wherein if the value of international transactions is less than threshold limits, then such power is exercised by Assessing Officer and in case it is above the threshold limit then power vests with the TPO to determine ALP of international transactions undertaken by assessee.

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first step in this regard is that the Assessing Officer should come to a finding that some income arises from the international transaction undertaken by assessee, which needs to be benchmarked and its ALP needs to be determined.

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transactions. The Ld. DR in this regard has strongly relied on the ratio laid down by the Hon’ble Delhi High Court in Sony India (P.) Ltd. Vs. CBDT & Anr. (supra).

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to show cause as to why ALP should not be so determined and thereafter, the Assessing Officer has to compute income of assessee having regard to ALP so determined. In the case of Vodafone India Services Pvt. Ltd. (supra), vide para 33 it has been held that when the Assessing Officer himself determines ALP in terms of section 92C(3) of the Act, then it is open to him to consider the issue of income arising and / or being effected or not before commencing proceedings under Chapter X or at the stage of passing of assessment order. In the present case, where the transfer pricing provisions have been carried out by TPO on reference made by Assessing Officer, we hold that provisions of section 92C(3) of the Act and proviso thereunder do not come into play.

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TPO. However, wherein objection is raised about the applicability of Chapter X by the assessee, then the requirement for taking a decision after taking on board the objection becomes necessary. The Hon’ble High Court further held that if this issue is considered at the very threshold by the Assessing Officer, it could save an elaborate exercise of determining the ALP, which may turn out to be entirely academic. The Hon’ble High Court thus, held that it is for the above reason that grant of personal hearing before referring the matter to TPO has to be read into section 92CA(1) in cases where the very jurisdiction to tax under Chapter X is challenged by the assessee.

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92CA (4) On receipt of the order under subsection (3), the Assessing Officer shall proceed to compute the total income of the assessee under subsection (4) of section 92C having regard to the arm's length price determined under subsection (3) by the Transfer Pricing Officer. (emphasis supplied) This was similar to the power which the Assessing officer still enjoys when he determines the ALP himself in terms of Section 92C(4) as pointed out above. Thus at that time the Assessing officer was not bound to complete the assessment in compliance with the ALP determination of the TPO and it was open to the Assessing officer to consider the question of jurisdiction at the time of passing the draft assessment order. However with effect from 2007, Section 92CA(4) has undergone a change and the Assessing officer is bound to pass an order in conformity with the ALP determined by the TPO. Amended Section 92CA(4) reads as under: 92CA(4) On receipt of the order under subsection (3), the Assessing Officer shall proceed to compute the total income of the assessee under subsection (4) of section 92C in conformity with the arm's length price as so determined by the Transfer Pricing Officer. (emphasis supplied) Therefore in the context of the preamendment law as then existing hearing on jurisdictional issues could take place after the order of the TPO which is not possible post amendment of 2007. In any case, the fact situation existing in this case of viz. a question of jurisdiction was not in issue in the above cases and therefore these two cases can have no application to the present case.‖

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TPO was a mere administrative act and the Assessing Officer has no discretion in the matter and the Assessing Officer hearing the assessee before making reference to the TPO would be an empty formality and a futile exercise. The Hon’ble High Court held that CBDT Circular regarding distribution of files depending on value of transaction could detract from the obligation of Assessing Officer to follow the principles of natural justice, which we have read into section 92CA(1) of the Act, because once the Assessing Officer refers transaction to TPO, the Assessing Officer will be bound to act in conformity with the order of TPO, as mandated by section 92CA(4) of the Act in all respects including jurisdictional issue as held by this Court in Vodafone India Service (P.) Ltd. Vs. Union of India (supra). The Hon’ble High court concluded by holding that there is no merit in the contention of Revenue that no hearing is required to be given to the assessee in respect of jurisdictional issue as there has to be consideration of petitioner’s objection to the applicability of Chapter X. The Lordship was of the view that the same should atleast find place in the impugned draft assessment order. The failure on the part of Assessing Officer in not having examined the issue of income arising or not from an international transaction was an illegality. The Hon’ble High Court quoted from Mr. Nani Palkhiwala who in the concluding paragraph of his Preface to the eighth edition of his monumental work had observed as under:-

―The Law and Practice of Income Tax‖ observed: ―Every Government has a right to levy taxes. But no Government has the right, in the process of extracting tax, to cause misery and harassment to the taxpayer and the gnawing feeling that he is made the victim of palpable injustice‖

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not deal with petitioner’s objection about applicability of Chapter X on the ground that it would be dealt in by the Assessing Officer. Thereafter, when the petitioner raises the same issue before the Assessing Officer, he does not deal with the same on the ground that he is bound to complete assessment in terms of ALP determined by TPO. In the facts of the case before the Hon’ble High Court, the assessee in Form No.3CEB audit report had reported a transaction of share investment and had pointed out that it was not an international transaction. This preliminary objection of petitioner was not dealt in by any of the authorities and an upward adjustment was made on account of ALP of international transaction. The matter in the case of Vodafone India Services Pvt. Ltd. (supra) was set aside to the file of DRP to decide preliminary issue as the proceedings were pending before the DRP.

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The assessee in reply, pointed out that Indorama Petrochem Ltd. was not its AE as defined in section 92A of the Act and also confirmed that both the companies were separate companies and were managed by independent Board of Directors and do not have either direct or indirect control over each other’s business. The petitioner states that thereafter nothing was heard from Assessing Officer but by a letter dated 31.03.2013, the Assessing Officer informed the petitioner that his case was referred to TPO for determination of ALP in relation to international transaction undertaken during the year. The case of petitioner before the Hon’ble High Court was that the above reference was illegal since in the year under question, it had not entered into any international transaction with its AEs and no reference of such transactions could have been made by Assessing Officer to TPO under section 92CA of the Act. The Hon’ble High Court decides the issue after referring to relevant provisions of Chapter X with special reference to section 92CA of the Act and vide paras 14 and 15 has held as under:- ―14. Section 92CA reveals that there are certain jurisdictional perquisites for 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 an international transaction or a specified domestic transaction. Where, as in the present case, the Assessee raises a threshold objection that it has not entered into any international transaction within the meaning of Section 92B of the Act, it is imperative for the AO to deal with such an objection. If the AO decides to nevertheless make a reference, he has to record the reasons, even prima facie, why he considers it necessary and expedient to make such a reference to the TPO. 15. What is referred to the TPO is the determination of the ALP of the said international transaction or specified domestic transaction. Therefore, the satisfaction to be arrived at by the AO regarding the existence of the international transaction or specified domestic transaction, even prima facie, is a sine qua non for making the reference to the TPO. Where such an Accountant's report is submitted by the Assessee in Form 3CEB, then there should be no difficulty for the AO to form an opinion, even a prima facie one, that it is necessary and expedient to make a reference to the TPO on the question of the determination of the ALP of such international transaction involving the Assessee.‖

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the Assessing Officer has to satisfy himself that the assessee has entered into international transactions with its AEs, one of the sources from which the factual information can be gathered was Form No.3CEB filed with the return of income. It was further held that where no such report in Form No.3CEB is filed by assessee what will be the basis for Assessing Officer to record that it is necessary and expedient to refer the question of determination of the ALP of such transaction to the TPO? The Hon’ble High Court in this regard held that Where the AO is of the view that a transaction reflected in the filed return partakes of the character of an international transaction, he will put the Assessee on notice of his proposal to make a reference to the TPO under Section 92CA(1) of the Act. It was further noted by the Hon’ble High Court that Before making a reference to the TPO, the AO has to seek approval of the Commissioner/Director as contemplated under the Act. Therefore, all transactions have to be explicitly mentioned in the letter of reference. The Hon’ble High Court thus, concluded by holding that The very nature of this exercise is such that the AO will first put the Assessee on notice of his proposing to make a reference to the TPO and seek information and clarification from the Assessee. If at this stage, the Assessee raises an objection as to the very jurisdiction of the AO to make the reference, then it will be incumbent on the AO to deal with such objection on merits. The Hon’ble High Court concluded by holding as under:- ―17. While Section 92CA(1) does not itself talk about a hearing having to be given to the Assessee upon the latter raising an objection as to the jurisdiction of the AO to make a reference, such requirement appears to be implicit in the very nature of the procedure that is expected to be followed by the AO. As already noticed, the AO has to record that he considers it necessary and expedient to make a reference. The AO has to deal with the objections raised by the Assessee. It is only thereafter that the AO can come to the conclusion, even prime facie, that it is necessary and expedient to make the reference. This has to be done prior to making a reference.‖

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heard to the taxpayer before recording his satisfaction or otherwise. It was further held that the said Instruction No.3/2016, dated 10.03.2016 which replaces earlier Instruction No.15/2015, clarifies the correct legal position and cannot be construed as not applying to the facts on hand. The Hon’ble High Court thus, held that since it was a procedural aspect and was intended to benefit the assessee, it requires to be applied even in the present case, where a reference was earlier made by the Assessing Officer to TPO on 31.03.2013 and thereafter. Since the Assessing Officer had made reference to TPO without affording an opportunity of being heard to the petitioner, the said references were set aside and the Assessing Officer was directed to provide fresh opportunity of hearing to the assessee.

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restrained by the Court referring to Circular dated 10.03.2016, which admittedly, came into force subsequent to the decision of Assessing Officer to refer the matter to TPO. It was held that transaction noted in clause 3.3 thereof, if involved, would give rise to jurisdictional requirement and it was incumbent upon the Assessing Officer to provide an opportunity of hearing to the assessee before recording his satisfaction or otherwise, he should pass a speaking order to comply with principles of natural justice. The Hon’ble High Court vide para 8 held that though the Circular was not invoked at the relevant point of time, the applicability of principles of natural justice and the requirement of Assessing Officer deciding on a jurisdictional fact cannot be denied. Section as it stood requires the Assessing Officer to take a decision on jurisdictional fact. Where the Assessing Officer did not afford any opportunity of hearing to the petitioner on the jurisdictional issue raised, then it ought not to have transferred the matter to TPO. It was held that Assessing Officer had acted in breach of principles of natural justice. The matter was set aside to the Assessing Officer to decide on the basis of show cause notice issued by him and reply given by assessee and in consonance with Circular of Department dated 10.03.2016.

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the Hon'ble Supreme Court in Deepak Agro Vs. State of Rajasthan & Ors. (2008) 7 SCC 748.

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the same. Then, she raised the question for consideration, in given facts, is that in such situation, how would Assessing Officer know / be satisfied that there is an element of income arising from the reported international transactions. Referring to observations of Hon’ble High Court in different paras, it was reiterated by the Ld. DR that once a report in Form No.3CEB was filed by accountant reporting international transactions, there was no dispute that there was income arising from such an international transaction and therefore, applicability of Chapter X becomes an admitted position. It is mentioned that it is only by way of Caveat, the Hon’ble High Court gave decision as in para 10 that the requirement of giving hearing to the assessee by Assessing Officer to consider it whether it is necessary or expedient to refer the matter to TPO. It was stressed by her that in order to demand a hearing, an objection must be raised before the Assessing Officer during the course of assessment proceedings that international transaction reported in Form No.3CEB do not have element of income in them and as no such objection was raised and since it is not case of assessee that international transactions so reported were not with AEs, then it was not incumbent upon the Assessing Officer to provide an opportunity of hearing or to record detailed satisfaction. She stressed that where the income arose from international transactions reported by assessee in Form No.3CEB filed before the Assessing Officer, it would be enough to apply Chapter X and would certainly constitute prima facie reason, for the Assessing Officer to consider it necessary and expedient to refer the matter to TPO as held by the Hon’ble High Court in the case of Vodafone India Services Pvt. Ltd. (supra) in para 34 of its order (discussed above). It is further argued that once the assessee had itself accepted that there was income arising from international transactions reported by it, the Assessing Officer was under no

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obligation to record a detailed satisfaction that there was profit shifting, etc. before referring the international transactions to TPO.

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resident Indian. The perusal of said reference letter clearly reflects that the Assessing Officer who have come to a conclusion vis-à-vis reference to TPO on two aspects i.e. sale of medicines and drugs by the assessee group, which not only included the assessee but various other companies and the second transaction which was reported was the one declared by assessee in its audit report i.e. export trading of medicines on wholesale basis. In such scenario, where the reference is made not only on account of transactions reported in Form No.3CEB but another transaction which as per the Revenue Department needs to be benchmarked first, in the hands of Shri Vinod Jadhav and then in the hands of assessee was a distinct and separate set of transactions. The TPO has also analyzed the said transactions and held that control and management of business carried on by several companies was in India and hence, 97% of world profits were to be taxed in the hands of assessee. In such scenario, there is no merit in arguments of Ld. DR that the Assessing Officer has only made reference in respect of transactions which are already reported in Form No.3CEB. The facts clearly show that what the Assessing Officer has referred is not only the transactions declared in Form No.3CEB but the transactions which as per the Revenue authorities starting from Investigation Team and other Officers needs to be benchmarked in the hands of assessee i.e. on account of sale of medicines by Sava group and other AEs, which are independent entities duly registered in the respective countries as per the laws of said countries.

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the matter to TPO, which the Assessing Officer has failed to do so. Though the Assessing Officer records reasons and even gets those reasons approved by CIT and clearly mentions the reasons for reference in the referral letter but fails to show cause the same to assessee. The said act of Assessing Officer is in contradiction to the provisions of section 92CA(1) of the Act. The copy of said reference letter was never given to the assessee either during the course of assessment proceedings / TP proceedings or DRP proceedings. The assessee has time and again objected to the exercise of powers by TPO alleging that no international transaction arises on the premise of benchmarking transaction of control and management of AE parties from India and that too, through assessee’s hands, but the said objection has not been dealt with by TPO or DRP and an order under section 92CA(3) of the Act passed by TPO, which has been partially modified by DRP. After such an order has been passed, the Assessing Officer, as per amended provisions of section 92CA(4) of the Act is bound to act in conformity with the said adjustment made. This is the mandate of section 92CA(4) of the Act. Hence, the jurisdictional issue raised by assessee i.e. whether it is an international transaction or not has not been answered by any of the authorities and the TP proceedings have been completed against assessee in violation of mandate of section 92CA(1) of the Act.

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decision in Writ Petition filed by assessee and vide order dated 29.11.2013, the issue has been decided. It may be pointed out herein itself that while deciding the aforesaid issue, the Hon’ble Bombay High Court had met with objections of Respondent Revenue that in placing reliance upon the decision of Hon’ble Bombay High Court in Vodafone India Services Pvt. Ltd. Vs. Union of India (2013) 37 taxmann.com 250 (Bom), (Vodafone-2) order dated 06.09.2013. In the said decision, it was held that DRP and ITAT were entitled to set right any defect in the order of TPO as reflected in the draft assessment order including the question of lack of jurisdiction of TPO. Vide para 19, the submissions of Respondent-Revenue were noted and vide para 20, it was held that it was not possible to accept the contention of Revenue that situation in Vodafone India Services Pvt. Ltd. (supra), dated 29.11.2013 (Vodafone 2) case was similar to the present case. In the facts of Vodafone India Services Pvt. Ltd. (supra), dated 29.11.2013 (Vodafone 2), the TPO had suo motu exercised the jurisdiction to determine ALP in respect of two unreported international transactions and it was held that the TPO has jurisdiction to determine ALP of two unreported and un-referred transactions.

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factual aspects of the case before them and notes that the petitioner had from the very outset objected to the jurisdiction of authorities to apply Chapter X on issue of shares at a premium by it to its holding company, which was evident from Form No.3CEB, where the accountant has specifically stated that the said transaction was not covered by Chapter X, as this issue of shares does not give rise or effect income. Further, even during TP proceedings while replying to the show cause notice, the assessee had in its reply protested to jurisdiction of TPO to apply Chapter X. Further, the Hon’ble High Court also referred to decision in Hindalco Industries Ltd. Vs. Addl.CIT (2012) 211 Taxman 315 (Bom) of the said Court itself to refuse to entertain Writ Petition on that ground that the petitioner had willingly participated in the proceedings before the TPO and hence, the Court refused to entertain the petition. In view of the same, the Hon’ble High Court held that none of the said decisions were applicable.

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may be reiterated that in Vodafone India Services Pvt. Ltd. (supra) (Vodafone 2), the Court held that Assessing Officer could not deviate from the order of TPO on any issue including the jurisdictional issue that the transaction is or is not an international transaction. Taking note of the fact that in case the draft assessment order was objected to before the DRP, then in that event, in terms of section 144C(13) of the Act, the Assessing Officer was obliged to complete assessment without granting hearing to the assessee in accordance with directions of DRP. In para 37 of the judgment, the Hon’ble High Court concluded by holding that Thus to our mind the hearing has to be given by the Assessing officer before making a reference to the TPO.

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transactions, the Tribunal held that there was no scope of allowing any opportunity to show cause. We agree with the said proposition but as pointed out in the paras hereinabove, the reported transaction in the hands of assessee in Form No.3CEB was the export trading of medicines and not world profits of various entities, of which the control and management was in India, as per finding of TPO.

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international transactions which come to his notice during the course of proceedings before him. We may here reiterate that the issue of giving show cause notice to the assessee by Assessing Officer before referring to TPO the matter for determination of ALP of international transactions stands covered by the dictate of jurisdictional High Court in the case of Vodafone India Services Pvt. Ltd. (supra). The decision in the case of Vodafone India Services Pvt. Ltd. (supra) is undoubtedly, in a Writ Petition, but vide the said decision, the Hon’ble High Court has laid down the principles to be applied during exercise of jurisdiction by Assessing Officer under section 92CA(1) of the Act. The principles are after taking into cognizance the pre-amended and post-amended provisions of section 92CA(4) of the Act. The Hon’ble High Court has taken note of earlier decisions of the said Court itself in Vodafone India Services Pvt. Ltd. (supra) (Vodafone 2) and of the Hon’ble High Court of Delhi on similar exercise of jurisdiction in Sony India (P.) Ltd. Vs. CBDT & Anr. (supra), which related to pre-amended era of section 92CA(1) of the Act. The Hon’ble High Court also has taken cognizance of submissions of Solicitor General that action of Assessing Officer in referring international transactions to TPO was mere administrative act, because as per CBDT Instruction No.3/2003, dated 20.05.2003, the Assessing Officer was to exercise powers under section 92C of the Act where the value of transaction was upto ₹ 5 crores (now revised to ₹ 15 crores) and the Assessing Officer is required to refer the transactions to TPO, where even the value of international transactions exceeds ₹ 5 crores (now exceeds to ₹ 15 crores). It was further argued that in view of above Circular, the Assessing Officer has no discretion in the matter and therefore, the Assessing Officer hearing the assessee before making reference to TPO would be an empty formality and futile exercise. The Hon’ble High Court vide para 44 noted this and vide para 45 holds as under:-

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―45. We are unable to accept the above submission of the revenue. CBDT Circular regarding distribution of files depending on value of transaction cannot detract from the obligation of AO to follow the principles of natural justice, which we have read into Section 92(A)(1), because once AO refers the transaction to TPO, AO will be bound to act in conformity with the order of TPO, as mandated by Sec.92 CA(4), in all respects including jurisdictional issue as held by this Court in Vodafone II case.‖

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assessee and various other concerns, the TPO refers to the findings of Investigation Team in relation to functions performed by India based companies for the business carried out in India and shown to be carried in Mauritius / UAE and summarized the same under para 10 under different heads. Based on the said findings of Investigation Team, the summary of functional analysis of business transactions of various multi-locational enterprises belonging to assessee group was summarized which is available at pages 13 and 14 of TPO’s order. Then, TPO refers to the transactions reported in Form No.3CEB and in para 14.2, it holds that as the management and control of affairs of assessee group, found to have been situated wholly in India, correct profitability of transactions entered into by assessee could not be ascertained by using TNMM method. Vide para 14.3, it was observed that it is therefore concluded that TNMM method is not most appropriate method for benchmarking such complex transactions, which have been designed to escape legitimate taxation in India, which have been made with the sole intent of tax evasion. In such scenario, the TPO vide para 15.1 was of the view that there was no better method than Profit Split Method to benchmark the transactions undertaken by the assessee and its AEs and profits earned by then, not only the transactions are complex, but its correct profitability in India cannot be ascertained by using TNMM method as the most appropriate method. He further holds that It is therefore conclusively proved that the entire control and management of the affairs of the assessee group is wholly situated in India. Then, he applies FAR analysis and lifts corporate veil and vide para 25.1, he holds that he has no doubt in his mind that day to day activities of the AE's in Mauritius and Dubai are operated from India and concludes by holding in para 25.2 that the affairs of parent company i.e. Anagha Pharma Ltd. i.e. assessee and AE's in Mauritius and

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Dubai were therefore, need to be treated as wholly. All the brain and functions of the group is situated in India and only minuscule work of receiving and sending money is left with the AE's in UAE and Mauritius. He benchmarks by applying PSM method.

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Services Pvt. Ltd. (supra) and it further goes on to refer to CBDT circular, which was issued on 10.03.2016 i.e. Instruction No.3/2016. The Hon’ble High Court dismissed the contention of Revenue that the said CBDT Instructions were prospective and held that since it was a procedural aspect and intended to benefit the assessee, hence would apply where the reference was made by the Assessing Officer to TPO on 31.03.2013 and thereafter. The decision was thus, given relying on the decision of Hon’ble Bombay High Court in the case of Vodafone India Services Pvt. Ltd. (supra) and re-affirmed by CBDT Instruction No.3/2016. This was the dictate of Hon’ble High Court, undoubtedly, though in a Writ Petition.

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(i) it is an Indian company; or (ii) its place of effective management, in that year, is in India Explanation.— For the purposes of this clause "place of effective management" means a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance made.

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mentioned in para 18 and plenty of evidence gathered and analysing the replies in various statements recorded by Investigation Team, the TPO then calls for employee-wise details and observed that online pharmacy or the business model of assessee is highly dependent on the employees. Then, he looks at the employees cost of assessee and at bottom of page 73 holds that It is therefore proved that entire control and management of affairs of assessee group is wholly situated in India. Then, under para 20, he draws a comparative analysis of assets held by assessee and its AE's in Dubai and Mauritius in tabulated charts and compares non-current assets held by AE's with base of non-current assets of assessee in India and holds that the AE's do not have any asset base in Dubai and Mauritius to carry out activities of AE's located in these countries and all the activities were carried out by assessee in India. It is therefore, conclusively proved that entire control and management of affairs of assessee group was wholly situated in India. In para 21, he looks at role of DHL i.e. entity in Singapore and again comes to the same finding that the entire control and management of assessee group was wholly situated in India. Vide para 22, he acknowledged that the assessee have been stating that there is no proof that control and management of affairs of assessee were wholly in India. He concludes that But, in view of the detailed discussion made above, it is held that the entire control and management of the affairs of the assessee group is wholly situated in India. Then, he talks of lifting of corporate veil and vide para 25.1 that he has no doubt in his mind that day to day activities of the AE's in Mauritius and Dubai were operated from India and he concludes by holding that affairs of parent company and AE's in Mauritius and Dubai, therefore, needs to be treated as wholly. After that, vide para 26 onwards, he applies Profit Split Method.

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power to set aside any proposed variation or issue any direction under sub- section (5) for further enquiry and passing of assessment order. In other words, the Panel while exercising its jurisdiction may confirm, reduce or enhance the variation. The question which arises is that while doing so, can the Panel, in this regard (a) benchmark new transaction than the one benchmarked by TPO and / or (b) benchmark altogether new transactions of alleged provision of services by assessee to AE entities, where no such transactions were reported in Form No.3CEB and no such transactions were benchmarked by TPO.

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of income with a view to its taxability or to its non taxability and not to any incidental connection‖. 18. The law laid down by the Hon’ble Apex Court has been reiterated by the full Bench of the Hon’ble Delhi High Court in the case of Commissioner of Income Tax Vs. Sardari Lal & Co. (2001) 251 ITR 864 (Del)(SB). The Hon’ble Delhi High Court held:- ―Looking from the aforesaid angles, the inevitable conclusion is that whenever the question of taxability of income from a new source of income is concerned, which had not been considered by the Assessing Officer, the jurisdiction to deal with the same in appropriate cases may be dealt with under section 147/148 of the Act and section 263 of the Act, if requisite conditions are fulfilled. It is inconceivable that in the presence of such specific provisions, a similar power is available to the first appellate authority‖. 19. The Pune Bench of Tribunal in M/s. Jaihind Engineers Vs. ITO in ITA No.791/PN/2016 relating to assessment year 2008-09 and in Shri Lalita G. Kale (Prop.) Vs. ITO in ITA No.792/PN/2016, relating to assessment year 2009-10, vide order dated 15.07.2016 held as under:- ―13. The Tribunal in M/s. Vijay Builders Vs. The Income Tax Officer (supra) while deciding similar issue of the power of enhancement of the Commissioner of Income Tax (Appeals) had relied on the ratio laid down in the following decisions : i. CIT Vs. Shapoorji Pallonji Mistry 44 ITR 891 (SC). ii. CIT Vs. Rai Bahadur Hardutroy Motilal Chamaria 66 ITR 443 (SC). iii. CIT Vs. Sardarilal and Company 120 taxmann 295 (Delhi). iv. CIT Vs. Union tyres 107 taxmann 447 (Delhi). 14. The Tribunal after considering the factual aspects of the case held as under : ―14. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and the CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find during the course of assessment proceedings, on being questioned by the AO, the assessee vide letter dated 10-12-2010 had clarified that all the advances received and paid have already been properly recorded in the regularly maintained books of accounts. It was also brought to the notice of the AO that during the survey operation the partner Shri Prakash Sanklecha was upset and could not give proper answers due to tension. Relying on various decisions the assessee had argued before the AO that no addition is called for. The assessee had also produced the books of accounts before the AO to substantiate that all those figures are already recorded in the books of account. On the basis of the above the AO has not made any addition. From the copy of the audited accounts filed in the paper book we find the assessee has shown works expenses at Rs.75,42,955/- as per Schedule-M. The Schedule-M annexed to the audited accounts shows labour charges at Rs.14,38,060/-. Similarly, the assessee has also shown purchases to the tune of Rs.68,11,278/-. We therefore find merit in the submission of the Ld. Counsel for the assessee that the figures in the impounded document area already entered in the regular books of account and therefore no addition is called for. Accordingly, we hold that the order of the Ld.CIT(A) enhancing the income by Rs.25 lakhs is not proper.

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14.1 Even otherwise also we are of the considered opinion that the Ld.CIT(A) was not justified in enhancing the income of the assessee by Rs.25 lakhs. The Hon’ble Supreme Court in the case of CIT Vs. Shapoorji Pallonji Mistry (Supra) has held that it would not be open to the AAC to introduce into assessment new sources, as his power of enhancement is restricted only to income which was subject matter of consideration for purposes of assessment. The Hon’ble Supreme Court in the case of Rai Bahadur Hardutroy Motilal Chamaria (Supra) has held that the power of enhancement of AAC is restricted to subject matter of assessment or sources of income which have been considered expressly or by clear implication by ITO from point of view of taxability of assessee. Therefore, AAC had no jurisdiction to assessee a source of income which had not been processed by ITO and which was not disclosed either in return filed by the assessee or in assessment order. We find that following the above decisions the Hon’ble Delhi High Court in the case of Sardarilal and Company (Supra) has held that whenever question of taxability of income from a new source of income is concerned which has not been considered by the AO, jurisdiction to deal with same in appropriate cases may be dealt with u/s.147/148 and section 263 if requisite conditions are satisfied. It is inconceivable that in presence of such specific provisions a similar power is available to the first appellate authority. The Hon’ble Delhi High Court in the case of Union Tyres (Supra) has also held similar view and held that it is not open to the appellate commissioner to introduce in assessment a new source of income and assessment has to be confined to those items of income which was subject matter of original assessment. The relevant observations of Hon’ble Delhi High Court at para Nos. 11 to 13 of the order reads as under : ―11. A question regarding powers of the first appellate authority came up for consideration before the Supreme Court recently in CIT v. Nirbheram Daluram [1977] 224 ITR 610/ 91 Taxman 181. Following their earlier decisions in Kanpur Coal Syndicate's case (supra) and Jute Corpn. of India Ltd.'s case (supra) though their Lordships reiterated that the appellate powers conferred on the Commissioner under section 251 could not be confined to the matter which had been considered by the ITO, as the Commissioner is vested with all the plenary powers which the ITO may have while making the assessment, but did not comment on the issue whether these wide powers also include the power to discover a new source of income. Therefore, the principle of law laid down in Shapoorji Pallonji Mistry's case (supra) and Rai Bahadur Hardutroy Motilal Chamaria's case (supra) still holds the field. 12. Thus, the principle emerging from the aforenoted pronouncements of the Supreme Court is, that the first appellate authority is invested with very wide powers under section 251(1)(a) and once an assessment order is brought before the authority, his competence is not restricted to examining only those aspects of the assessment about which the assessee make a grievance and ranges over the whole assessment to correct the Assessing Officer not only with regard to a matter raised by the assessee in appeal but also with regard to any other matter which has been considered by the Assessing Officer and determined in the course of assessment. However, there is a solitary but significant limitation to the power of revision, viz., that it is not open to the Commissioner to introduce in the assessment a new source of income and the assessment

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has to be confined to those items of income which were the subject matter of original assessment. 13. Applying the above well-settled principles of law to the facts of the instant case, we are of the view that the Tribunal was justified in holding that in calling for a remand report on the aforenoted four points, the Commissioner had exceeded his jurisdiction. While computing the total business income of the assessee, the Assessing Officer had estimated the sales at an enhanced figure and had applied a higher rate of gross profit. Thus, the only matter dealt with by the Assessing Officer in the assessment order was the estimation of profits and gain of the business of the assessee. None of the aforenoted four points had any bearing on the question of estimation of either the sales or the gross profit rate. From the observations, extracted above', it is evident that the Commissioner had his doubts about the capacity of the assessee to raise finances for the purchase of goods and show a huge turnover in the very first year of his business. In other words, the enquiry ordered by the Commissioner was to satisfy himself about the source of investment by the assessee. It is axiomatic that failure to prove the sources of investment will result in addition in the hands of the assessee under a different provision of law and will not have much relevance in the estimation of sales and gross profit rate adopted by the Assessing Officer. In our. opinion, any addition on account of unexplained investment would constitute a new source of income which was not the subject-matter of assessment before the Assessing Officer and, therefore, it was not open to the first appellate authority to direct the Assessing Officer to conduct enquiry on the said four points. 14. For the foregoing reasons, we answer the question in the affirmative, i.e., in favour of the assessee and against the revenue. No order as to costs.‖ 14.2 In view of the above decisions we hold that the Ld.CIT(A) has no power to enhance the income of the assessee by introducing a new source of income which had not been considered by the AO. Addition, if any, on that account can be made by taking recourse into provisions of section 147/148 and section 263. We accordingly hold that both factually as well as legally the Ld.CIT(A) is not justified in enhancing the income of the assessee by Rs.25 lakhs. We accordingly set aside the order of the CIT(A) on this issue and direct the AO to delete the addition.‖ 15. The issue before the Hon'ble Delhi High Court in CIT Vs. Union Tyres (supra) was also with regard to suppressed addition on account of source of investment and the Hon'ble High Court held that the said addition would be under a different provisions of law and would not have any reliance to estimating the sales and gross profit rate adopted by the Assessing Officer and was beyond the scope of the First Appellate Authority……‖

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―24. The CIT(A) has found new source of income i.e. total receipts found in the Dummy HO Cash Book at Rs.1.05 crores and has made the addition on that account. The CIT(A) in the present case has travelled beyond the sources of income which was the subject matter of consideration by the Assessing Officer, wherein the Assessing Officer after accepting the contract receipts had doubted the expenses claimed by the assessee and accordingly, applied the net profit rate to determine the income in the hands of assessee. The CIT(A) had first started enquiries in respect of payments made by the assessee which was the issue considered by the Assessing Officer while completing assessment under section 143(3) of the Act. Later, the CIT(A) has issued the show cause notice, wherein reference was made to receipts, which were accepted by the Assessing Officer and not disturbed. In the absence of any enquiry by the Assessing Officer regarding receipts recorded in the Dummy HO Cash Book, the same was outside the purview of enhancement scope of the CIT(A). In case any new source of income is to be added in the hands of assessee which was not considered by the Assessing Officer, the jurisdiction to deal with the same in appropriate cases, is to be dealt with under section 147/148 of the Act and / or under section 263 of the Act, where requisite conditions are fulfilled. Such is the proposition laid down by the Hon’ble High Court of Delhi in CIT Vs. Sardari Lal & Co. (supra). Applying the said propositions and the dictate of the Hon'ble Supreme Court on the issue, we hold that it is not open to the CIT(A) to introduce in the assessment a new source of income and the assessment had to be confined to those items of income which were the subject matter of original assessment. Accordingly, we reverse the order of CIT(A) in this regard and delete the addition of Rs.1.05 crores. The grounds of appeal raised by the assessee are thus, allowed.‖

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that control and management of the affairs of assessee group was wholly in India and then, he applies the Profit Split Method on world profits and hold that 97% of said profits are to be assessed in the hands of assessee. The assessee files objections before the DRP. It first challenges the order of TPO on the ground that no such international transaction exists and cannot be benchmarked. The DRP does not deal with the same. The next challenge was to the finding of TPO vis-à-vis control and management from India. The DRP while deciding the issue first, decides the issue of international transaction of supply of goods, which is reported in Form No.3CEB. It may again be pointed out that the TPO does not give any finding on this issue though the said transaction is reported in Form No.3CEB. But where the TPO has not exercised his jurisdiction, the DRP in exercise of his powers cannot benchmark new transaction though reported by assessee, in the hands of assessee. Further, the DRP benchmarks the second transaction in the hands of assessee and overturns the order of TPO and holds that AE's are not sham, but are legal entities and attributes part of global profits, first to the assessee and then another part to AE’s and the residuary profits are divided amongst the assessee and AE’s. In the result, 70% of world profits are added in the hands of assessee under guise of Profit Split Method. The rules in this regard are completely overlooked and no comparables are selected and on its own, allocation of profits is made by the DRP. The said exercise carried out by DRP is beyond its scope and is new line of adjustment, which is outside its jurisdiction. The DRP has also failed to consider the aspect that no such transaction was reported in Form No.3CEB by the assessee and has failed to address the issue raised by assessee. In this regard, we find no merit in the exercise of jurisdiction by the DRP. The Ld. DR has placed reliance on several case laws in this regard, explaining the powers of DRP, but those are

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distinguishable on facts. Accordingly, we quash the findings of DRP and consequent order passed under section 143(3) of the Act. Both the jurisdictional issues are thus, decided in favour of assessee and assessment order passed in the case is held to be invalid and bad in law.

Order pronounced on this 27th day of June, 2019.

Sd/- Sd/- (ANIL CHATURVEDI) (SUSHMA CHOWLA) ऱेखा सदस्य / ACCOUNTANT MEMBER न्याययक सदस्य / JUDICIAL MEMBER ऩुणे / Pune; ददनाांक Dated : 27th June, 2019. GCVSR आदेश की प्रयतलऱपप अग्रेपषत/Copy of the Order is forwarded to : The Appellant; 1. The Respondent; 2. The DRP-3 (WZ), Mumbai; 3. The CIT(TP&IT), Pune; 4. The DR ‘B’, ITAT, Pune; 5. Guard file. 6. आदेशािुसार/ BY ORDER, सत्यापऩत प्रतत //True Copy// वररष्ठ तनजी सचिव / Sr. Private Secretary आयकर अऩीऱीय अचधकरण ,ऩुणे/ ITAT, Pune