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Income Tax Appellate Tribunal, MUMBAI BENCH “K”, MUMBAI
Before: VIKAS AWASTHY & SHRI N.K.PRADHAN
आदेश/ ORDER
PER VIKAS AWASTHY, J.M.:
This appeal by the assessee is against the assessment order dated 18/10/2017 passed under section 143(3) r.w.s. 144C(5) of the Income Tax Act, 1961 (in short ‘the Act’) for the assessment year 2013-14.
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The assessee in appeal has raised seven grounds. Shri Sanjay Chokshi appearing on behalf of the assessee submitted at the outset that he is not pressing ground No.3 to 5 of the appeal. The ground of appeal No.6 and 7 are general in nature. Thus, the grounds on which he would be making submissions are ground No.1 & 2 only.
3. In view of the above statement made by ld. Authorized Representative of the assessee ground No.3 to 5 of the appeal are dismissed as not pressed. The effective grounds for adjudication before the Tribunal are thus, ground No.1 and 2 of the appeal, the same read as under:-
“1. The Learned Assessing Officer under directions from the Honourable Dispute Resolution Panel as well as the Learned Transfer Pricing Officer erred in law and on facts in applying the transfer pricing provisions (section 92 to section 92F of the Act) to Your Assessee inspite of the fact of that both Narayan Foods Limited and Ambico Exports and Imports Private Limited (UK) are neither Associated Enterprise as defined under section 92A of the Act nor a related party as defined under section 40A(2)(b) of the ACT to Your Assessee.
2. The Learned Assessing Officer erred in law and on the basis of facts to make a reference to the Learned Transfer Pricing Officer under section 92CA(1) of the ACT for determining arms length price on transactions with Narayan Foods Limited and Ambico Exports and Imports Private Limited (UK) without providing an opportunity to Your Assessee to herd in the matter.”
The ld. Authorized Representative of the assessee narrating the facts of case submitted that the assessee is engaged in trading of diamonds, export and import of chemicals, rough diamonds, general items and processing – cutting and polishing of rough diamonds. During the period relevant to assessment year under appeal, the assessee entered into transactions with Ambico Exports & Imports Pvt. Ltd. UK (in short ‘Ambico UK) and Narayan Foods Ltd. UK (in short ‘Narayan UK). Since, the aforesaid entities are not Associated Enterprise (AE) within the meaning of section 92A of the Act, the transactions with the said entities were not reported in Transfer Pricing Study.
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4.1 The ld. Authorized Representative of the assessee submitted that the Transfer Pricing Officer (TPO) has erred in making adjustment of Rs.1,68,66,580/- by holding that the assessee has entered into international transactions with its AEs. viz.- Ambico UK and Narayan UK. The TPO further erred in holding that the assessee has not maintained the documents as required u/s.92D of the Act and Rule 10B of the Income Tax Rules. Though Ambico UK & Narayan UK were not AEs of the assessee, however, as a matter of abundant caution the assessee furnished TP documentation and benchmarked the international transactions with aforesaid foreign entities by applying CUP as the most appropriate method. The Assessing Officer held that Ambico UK and Narayan UK are AEs within the meaning of clause (j) of section 92A(2) of the Act and made reference to TPO for determining arm’s length price (ALP) of the transactions with the said entities.
4.2. The ld. Authorised Representative of assessee submitted that Harshad Danesh Patel is a Director of Ambico UK and holds 50% shares in Ambico UK and Narayan UK. The remaining 50% shares in UK entities are held by his brother. In Indian entity i.e. the assessee, Harshad Danesh Patel hold 2.35% shares. The total shareholding in the assessee company by Harshad Danesh Patel alongwith his relatives is 11.60%. In the case of assessee, twin conditions set out in clause (j) of section 92A(2) are not satisfied. The Dispute Resolution Panel (DRP) has invoked the provisions of section 92A(1)(b) of the Act alone and has completely ignored the provisions of section 92A(2) of the Act to hold Ambico UK & Narayan UK as AE of the assessee. The Tribunal in various decisions has held that the provisions of section 92A(1) and 92A(2) have to be read together. The basic conditions set out in sub-section(1) are not 4 आअसं. 6822/मुं/2017 (�न.व. 2013-14) IT(TP)A NO.6822/MUM/2017(A.Y.2013-14) independent of the specific situations set out in sub-section (2) of section 92A of the Act. The DRP has erred holding that, since case of the assessee squarely falls within the ambit of section 92A(1)(b) of the Act, there is no need to travel to sub-section (2) of section 92A of the Act. The ld. Authorized Representative of the assessee buttress his contentions placed reliance on the following decisions: (i) Orchid Pharma Ltd. vs. DCIT, 143 DTR 34 (Bang-Trib) (ii) ACIT vs. Veer Gems, 77 taxmann.com 127 (Ahd-Trib) (iii) Kaybee Pvt. Ltd. vs. ITO, 204 TTJ 921 (Mumbai) (iv) Page Industries Ltd. vs. DCIT, 159 ITD 680 (Bang)
4.3. The ld. Authorized Representative of the assessee submitted that in ground No.2 of the appeal the assessee has raised a legal ground i.e. the Assessing Officer has not served any show cause notice on assessee before making reference to TPO under section 92CA (1) of the Act. He asserted that the basic principle of natural justice was violated before invoking the provisions of Chapter-10 of the Act. The ld. Authorized Representative of the assessee pointed that the CBDT had issued guidelines for implementation of TP provisions vide Instruction No.3/2016 dated 10/03/2016 wherein, it has been categorically mentioned that where the Assessing Officer has to make reference to the TPO, the Assessing Officer as a jurisdictional requirement is mandatorily required to record his satisfaction. Before recoding satisfaction for making reference to the TPO, it is obligatory for the Assessing Officer to provide opportunity of hearing to the assessee. The ld. Authorized Representative of the assessee submitted that in the present case, the only so 5 आअसं. 6822/मुं/2017 (�न.व. 2013-14) IT(TP)A NO.6822/MUM/2017(A.Y.2013-14) called opportunity that was given to the assessee by the Assessing Officer was through order sheet entry dated 07/03/2016. As per said entry the assessee was directed to file an affidavit of Harshad Danesh Patel regarding no association with Ambico UK and Narayan UK. The direction to file an affidavit cannot be regarded as show cause notice as envisaged under the provisions of the Act or CBDT instructions (supra). The assessee in one of its reply (at page- 12 of the Paper Book) has clarified that the report in Form-3CCEB is not filed as the same is not applicable. Thus, the assessee has categorically conveyed that the TP provisions are not attracted in the instant case.
The assessee in objections before the DRP had raised a ground against not granting opportunity of hearing before making reference to TPO. The DRP instead of decided the issue on merits has rejected the objections of the assessee by holding that these are delaying tactic. The ld. Authorized Representative of the assessee submitted that in the case of Indorama Synthetics (India) Ltd. vs. Addl. CIT, 143 DTR 15 (Del) and Vodafone India Services Pvt. Ltd. vs. Addl. CIT, 361 ITR 531(Bom), it has been held that opportunity of hearing before making reference to TPO is must.
4.4. The ld. Authorized Representative of the assessee pointed that in so far as merits of the adjustment on the international transactions are concerned, the same were deleted by the DRP, hence, the assessee has no grievance on merits of the addition. The ld. Authorized Representative of the assessee further pointed that the assessee has been doing business with Ambico UK and Narayan UK in the past as well, no adjustment was made as the transactions between the assessee and two overseas entities were never considered as 6 आअसं. 6822/मुं/2017 (�न.व. 2013-14) IT(TP)A NO.6822/MUM/2017(A.Y.2013-14) transactions between AE. The impugned assessment year is the first assessment year, where TP provisions have been invoked.
Au contraire, Shri Sunil Deshpande representing the Department vehemently defended directions of the DRP and the assessment order. The ld. Departmental Representative submitted that the assessee and Ambico UK and Narayan UK are AEs within the meaning of Sec. 92A of the Act. Harshad Danesh Patel is common shareholder between the entities. In the overseas entities, he is holding 50% shares and in Indian entity he along with his relatives hold nearly 12% shareholding. Thus, he exercises his influence in management and control on Indian and overseas entities.
In respect of issue of affording opportunity of hearing, the ld. Departmental Representative submitted that the assessee was given two opportunities to file his objections against reference to the TPO. The assessee failed to avail those opportunities to make out a case in its favour. The assessee thereafter, participated in the TP proceedings without raising any further objection. The ld. Departmental Representative prayed for dismissing the appeal filed by the assessee.
We have heard the submissions made by rival sides and have examined the orders of authorities below. The two issues that have been agitated by the assessee before us are:
(i) Whether the assessee, Ambico UK and Narayan UK are AEs as defined under section 92A of the Act; and 7 आअसं. 6822/मुं/2017 (�न.व. 2013-14) IT(TP)A NO.6822/MUM/2017(A.Y.2013-14)
(ii) Whether proper show cause notice was served to the assessee by the Assessing Officer before making reference to TPO under section 92CA(1) of the Act.
We will first take issue raised in ground No.1 of the appeal. Before proceeding further it would be relevant to refer to the meaning of Associated Enterprises as defined under section 92A of the Act. “92A (1) For the purposes of this section and sections 92, 92B, 92C, 92D, 92E and 92F, "associated enterprise", in relation to another enterprise, means an enterprise— (a) which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; or (b) in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise. (2) For the purposes of sub-section (1), two enterprises shall be deemed to be associated enterprises if, at any time during the previous year,— (a) one enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in the other enterprise; or (b) any person or enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in each of such enterprises; or (c) a loan advanced by one enterprise to the other enterprise constitutes not less than fifty-one per cent of the book value of the total assets of the other enterprise; or (d) one enterprise guarantees not less than ten per cent of the total borrowings of the other enterprise; or (e) more than half of the board of directors or members of the governing board, or one or more executive directors or executive members of the governing board of one enterprise, are appointed by the other enterprise; or (f) more than half of the directors or members of the governing board, or one or more of the executive directors or members of the governing board, of each of the two enterprises are appointed by the same person or persons; or (g) the manufacture or processing of goods or articles or business carried out by one enterprise is wholly dependent on the use of know-how, patents, copyrights, trade- marks, licences, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights; or 8 आअसं. 6822/मुं/2017 (�न.व. 2013-14) IT(TP)A NO.6822/MUM/2017(A.Y.2013-14)
(h) ninety per cent or more of the raw materials and consumables required for the manufacture or processing of goods or articles carried out by one enterprise, are supplied by the other enterprise, or by persons specified by the other enterprise, and the prices and other conditions relating to the supply are influenced by such other enterprise; or (i) the goods or articles manufactured or processed by one enterprise, are sold to the other enterprise or to persons specified by the other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprise; or (j) where one enterprise is controlled by an individual, the other enterprise is also controlled by such individual or his relative or jointly by such individual and relative of such individual; or (k) where one enterprise is controlled by a Hindu undivided family, the other enterprise is controlled by a member of such Hindu undivided family or by a relative of a member of such Hindu undivided family or jointly by such member and his relative; or (l) where one enterprise is a firm, association of persons or body of individuals, the other enterprise holds not less than ten per cent interest in such firm, association of persons or body of individuals; or (m) there exists between the two enterprises, any relationship of mutual interest, as may be prescribed”.
The sub-section (1) of section 92A of the Act lays down basic rules for treating enterprises as AE. As per provisions of sub-section (1), management or control or capital are the three basic parameters that determines whether the two entities are AEs. Sub-section (2) enlists specific circumstances in clause (a) to (m), upon satisfaction of which two or more entities shall be deem to be AE for the purpose of sub-section (1). The sub-section (2) was amended by Finance Act, 2002. After amendment following opening words were inserted to sub-section (2), “For the purpose of sub-section (1)…………..”. A perusal of Memorandum to Finance Bill 2002 would show that section 92A(2) was amended to clarify that a mere fact of participation by one enterprise in the management or capital or control of the other enterprise would not make them AEs unless the criteria specified u/s 92A(2) are also fulfilled. Thus,
9 आअसं. 6822/मुं/2017 (�न.व. 2013-14) IT(TP)A NO.6822/MUM/2017(A.Y.2013-14) provisions of sub-section (2) have to be read along with sub-section (1). In other words, sub-section (1) and (2) of section 92A of the Act are not independent provisions, but have to be read in conjunction with each other. Unless the conditions set out in sub-section (1) and sub-section (2) are satisfied, the two entities cannot be held to be AEs.
In the case of Orchid Pharma Ltd. (supra), the Tribunal after considering the provisions of section 92A threadbare, the effect of amendment to sub- section (2) by the Finance Act, 2002 and various decisions on the issue held as under:- “[10] A plain reading of this statutory provision makes the legal position quite clear. The basic rule for treating the enterprises as associated enterprises is set out in Section 92A(1). The illustrations in which basic rule finds application are set out in Section 92A(2). Section 92A(1) lays down the basic rule that in order to be treated as associated enterprise one enterprise, in relation to another enterprise, participate, directly or indirectly, or through one or more intermediaries, “in the management or control or capital of the other enterprise” or when “one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise” . Section 92(A)(2) only provides illustrations of the cases in which such an enterprise participates in management, capital or control of another enterprise. In other words, what Section 92A (1) decides is the principle on the basis of which one has to examine whether or not two or more enterprise are associated enterprise or not. The principle is, as we have noted above, that one of the enterprise, in relation to other enterprise, participate, directly or indirectly, in the management or control or capital of the other enterprise and that persons who participate in such management, control or capital of both the enterprises are common. As long as an enterprise participates in any of the three aspects of the other enterprise, i.e. (a) management; (b) capital; or (c) control, these enterprises are required to be treated as associated enterprise, as also is the position when common persons participate in management, control or capital of both the enterprises. However, the expression ‘participation in management or capital or control’ is not a defined expression. To find the meaning of this expression, one has take recourse to Section 92(2) which gives practical illustrations, which are exhaustive and not simply illustrative- as clarified in the Memorandum explaining the provisions of the Finance Bill 2002 which, while inserting the words “For the purpose of sub section 10 आअसं. 6822/मुं/2017 (�न.व. 2013-14) IT(TP)A NO.6822/MUM/2017(A.Y.2013-14)
(1) of section 92A” in Section 92A(2), observed that “It is proposed to amend sub- section (2) of the said section to clarify that the mere fact of participation by one enterprise in the management or control or capital of the other enterprise, or the participation of one or more persons in the management or control or capital of both the enterprises shall not make them associated enterprises, unless the criteria specified in sub-section (2) are fulfilled”. In this sense, Section 92A(2) governs the operation of Section 92A(1) by controlling the definition of participation in management or capital or control by one of the enterprise in the other enterprise. If a form of participation in management, capital or control is not recognized by Section 92A(2), even if it ends up in de facto or even de jure participation in management, capital or control by one of the enterprise in the other enterprise, it does not result in the related enterprises being treated as ‘associated enterprises’. Section 92A(1) and (2), in that sense, are required to be read together, even though Section 92A(2) does provide several deeming fictions which prima facie stretch the basic rule in Section 92A(1) quite considerably on the basis of, what appears to be, manner of participation in “control” of the other enterprise”. [Emphasized by us]
In the case of Veer Gems (supra), the Tribunal reiterated that if participation in management or capital or control is not recognised by section 92A(2), even if it results in de facto or de jure participation in management, capital or control by one of the enterprises, it does not result in treating the related enterprises as ‘associated enterprises’. The relevant extract of the observations of the Tribunal are as under: “8. As we deal with this issue, let’s first appreciate the scheme of Section 92A. A plain reading of this statutory provision makes the legal position quite clear. The basic rule for treating the enterprises as associated enterprises is set out in Section 92A(1). The illustrations in which basic rule finds application are set out in Section 92A(2). Section 92A(1) lays down the basic rule that in order to be treated as associated enterprise one enterprise, in relation to another enterprise, participate, directly or indirectly, or through one or more intermediaries, “in the management or control or capital of the other enterprise” or when “one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise” . Section 92(A)(2) only provides illustrations of the cases in which such an enterprise participates in management, capital or control of another enterprise. In other words, what Section 92A (1) decides is the principle on the basis of which one
11 आअसं. 6822/मुं/2017 (�न.व. 2013-14) IT(TP)A NO.6822/MUM/2017(A.Y.2013-14) has to examine whether or not two or more enterprise are associated enterprise or not. The principle is, as we have noted above, that one of the enterprise, in relation to other enterprise, participate, directly or indirectly, in the management or control or capital of the other enterprise and that persons who participate in such management, control or capital of both the enterprises are common. As long as an enterprise participates in any of the three aspects of the other enterprise, i.e. (a) management; (b) capital; or (c) control, these enterprises are required to be treated as associated enterprise, as also is the position when common persons participate in management, control or capital of both the enterprises. However, the expression ‘participation in management or capital or control’ is not a defined expression. To find the meaning of this expression, one has take recourse to Section 92(2) which gives practical illustrations, which are exhaustive and not simply illustrative- as clarified in the Memorandum explaining the provisions of the Finance Bill 2002 which, while inserting the words “For the purpose of sub section (1) of section 92A” in Section 92A(2), observed that “It is proposed to amend subsection (2) of the said section to clarify that the mere fact of participation by one enterprise in the management or control or capital of the other enterprise, or the participation of one or more persons in the management or control or capital of both the enterprises shall not make them associated enterprises, unless the criteria specified in sub-section (2) are fulfilled”. In this sense, Section 92A(2) governs the operation of Section 92A(1) by controlling the definition of participation in management or capital or control by one of the enterprise in the other enterprise. If a form of participation in management, capital or control is not recognized by Section 92A(2), even if it ends up in de facto or even de jure participation in management, capital or control by one of the enterprise in the other enterprise, it does not result in the related enterprises being treated as ‘associated enterprises’. Section 92A(1) and (2), in that sense, are required to be read together, even though Section 92A(2) does provide several deeming fictions which prima facie stretch the basic rule in Section 92A(1) quite considerably on the basis of, what appears to be, manner of participation in “control” of the other enterprise. What is thus clear that as long as the provisions of one of the clauses in Section 92A(2) are not satisfied, even if an enterprise has a de facto participation capital, management or control over the other enterprises, the two enterprises cannot be said to be associated enterprises. That is a what coordinate bench decisions in the cases of Orchid Pharma Ltd Vs DCIT [(2016) 76 taxmann.com 63 (Chennai - Trib.)] and Page Industries Ltd Vs DCIT {(2016) 159 ITD 680 (Bang)] also hold. ” [Emphasised by us]
The Hon'ble Gujarat High Court in an appeal filed by the revenue i.e. Pr.CIT vs Veer Gems, 407 ITR 639 has upheld the decision of the Tribunal. The Hon’ble Apex Court (256 Taxman 298) while dismissing the SLP filed by the 12 आअसं. 6822/मुं/2017 (�न.व. 2013-14) IT(TP)A NO.6822/MUM/2017(A.Y.2013-14)
Revenue has approved the decision of Hon'ble Gujarat High Court. Thus, the view taken by the Tribunal, that the provisions contained in sub-section (1) and sub-section (2) of section 92A have to be read in conjunction, has attained finality.
In a recent decision the coordinate Bench of the Tribunal in the case of Kaybee Pvt. Ltd vs ITO (supra) has distinguished the decision of Tribunal in the case of Diageo India Pvt. Ltd. vs. DCIT 47 SOT 252 and followed the decision of Hon’ble Gujrat High Court in the case of Veer Gems (supra). The Bench after emphasizing the importance of maintaining judicial discipline in following the decisions of higher forums, finally concluded by observing: “18. Learned representatives fairly agree that the case of the Assessing Officer hinges only on application of Section 92A(1) and it does not meet any of the specific conditions set out in Section 92A(2). Once we hold that Section 92A(1) cannot be applied on standalone basis, and has to be essentially considered in conjunction of Section 92A(2) – only when it satisfies at least one of the conditions set out therein, it is clear that the relationship between the assessee company and its KE-S cannot be said to be that of the associated enterprises. The case of the revenue must, therefore, fail on this test.”
In the instant case, the DRP has held that the basic conditions laid down in sub-section (1)(b) of section 92A of the Act are satisfied, therefore, there is no need to travel to the provisions of sub-section(2) of section 92A of the Act. The DRP further observed that there no requirement under the section to simultaneous satisfy the conditions set out in sub-section (1) & (2). The DRP further went on to remark that drawing such an inference would render the provisions of section 92A(1) otiose. The observations of the DRP are contrary to the law settled by the Hon’ble Apex Court and various decisions rendered by the Tribunal over the period of time. The Revenue has failed to make out a 13 आअसं. 6822/मुं/2017 (�न.व. 2013-14) IT(TP)A NO.6822/MUM/2017(A.Y.2013-14)
case that the assessee and the two foreign enterprises fall in any of the deeming provisions enlisted in clause (a) to (m) of sub-section (2) of section 92A of the Act. In the light of the above facts and the decisions discussed above we have no hesitation in holding that the assessee, Ambico UK and Narayan UK do not fall within the definition of AE as defined u/s 92A of the Act. Hence, the transactions between the assessee and two foreign entities are outside the realm of TP provisions. We find merit in the contentions of the assessee. The ground No.1 of the appeal is allowed, accordingly.
In ground No.2 of the appeal the assessee has assailed reference to TPO u/s 92CA(1) of the Act. The contention of the assessee is that show cause notice was issued to the assessee before making reference to the TPO. The ld. Authorized Representative of the assessee referred to noting sheet entry dated 07/03/2016, wherein the assessee was asked to furnish affidavit of Harshad Danesh Patel regarding no association with overseas entities. We find that the assessee had raised this issue before DRP as well. The DRP in para 5.11 of the directions recorded that the assessee has admitted that twice through order sheet entry the assessee was asked to respond to its relationship with Ambico UK and Narayan UK.
The CBDT vide Instruction No.3/2016 (supra) has issued guidelines for implementation of TP provisions. In the said instruction the manner and procedure for making reference to TPO has also been explained. A perusal of the same shows that it has been categorically mentioned in the CBDT Instruction that Assessing Officer must provide an opportunity of hearing to the assessee before recording his satisfaction in the following three situations:
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- where the taxpayer has not filed the Accountant's report under section 92E of the Act but the international transactions or specified domestic transactions undertaken by it come to the notice of the AO; - where the taxpayer has not declared one or more international transaction or specified domestic transaction in the Accountant's report filed under section 92E of the Act and the said transaction or transactions come to the notice of the AO; and - where the taxpayer has declared the international transactions or specified domestic transactions in the Accountant's report filed under section 92E of the Act but has made certain qualifying remarks to the effect that the said transactions are not international transactions or specified domestic transactions or they do not impact the income of the taxpayer.
In case, no objection is raised by the assessee to the application of provisions of Chapter-10 of the Act, then the Assessing Officer should refer international transaction or specified domestic transaction to the TPO. Though no specific manner of affording opportunity of hearing has been detailed in the said instruction but in legal jurisprudence issuance of ‘show cause notice’ is the foundation of any legal proceedings. Show cause notice is not merely a formality. It provides an opportunity to the noticee to raise objection and put forth his contention before the initiation of lis.
The Hon’ble Delhi High Court in the case of Indorama Synthetic (India) Ltd.(surpa) after considering the decision rendered in the case of Vodafone India Services Ltd. vs. Union of India (supra), 361 ITR 531(BOM) and CBDT Instruction No.3/2016 has held as under: “21. As far as the present case is concerned, the Assessee has not filed the Accountant’s report under Section 92E of the Act. Yet the AO has to proceed to determine the ALP under Section 92C (3) of the Act or refer the matter to the TPO to determine the ALP under Section 92CA (1) of the Act in case the Assessee has not declared one or more international transactions in the report filed under Section 92E of the Act. As explained in the above situations in para 3.2, the AO must provide an opportunity of being heard to the taxpayer before recording his satisfaction or otherwise.
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Although Mr. Manchanda tried to contend that the above instruction of the CBDT was prospective, in the considered view of the Court, the above CBDT‟s Instruction No. 15 of 2015 as replaced by CBDT Instruction No.3 of 2016 dated 10th March 2016 clarifies the correct legal position and cannot be construed as not applying to the facts on hand. Since it isa procedural aspect and is intended to the benefit to the Assessee, it requires to be applied even in the present case where a reference was earlier made by the AO to the TPO on 31st March 2013 and thereafter.
For all the aforesaid reasons, the Court is of the view that the three references made by the AO to the TPO on the question of determination of ALP of the alleged international transactions involving the Petitioner and its AE have been made without affording the Petitioner an opportunity of being heard as was required by law. This, as explained by the Bombay High Court in Vodafone India Services (P) Limited v. Union of India (supra), and reaffirmed by the CBDT‟s Instruction No. 3 of 2016, is a procedural requirement implicit in Section 92 CA (1) of the Act. Accordingly, the said three references made by the AO to the TPO for determination of the said question for the AYs 2011-12, 2012-13 and 2013-14 are hereby set aside.
The question of whether or not a reference should be made to the TPO, for the three AYs in question, will now be determined by the AO afresh after giving the Petitioner an opportunity of being heard in respect of each of the AYs within the next 15 days. At least one week's advance notice be given to the Petitioner of the exact date of hearing before the AO.
After hearing the Petitioner, and within a period of four weeks after the conclusion of such hearing, the AO will issue a fresh order stating whether the AO considers it necessary and expedient to make a reference to the TPO on the question of determination of the ALP of the international transactions, if any, involving the Petitioner. The said decision will be communicated forthwith to the Petitioner and in any event not later than one week from the date it is issued.
If aggrieved by such decision, it will be open to the Petitioner to seek appropriate relief which may be available to the Petitioner in accordance with law.”
The Hon’ble High Court has held that opportunity of hearing is a procedural requirement implicit in section 92CA(1) of the Act. The Hon’ble High Court set aside the references made to TPO in the impugned assessment years and referred the issue back to the Assessing Officer for fresh determination after affording opportunity of hearing to the assessee.
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The present case undisputedly falls under one of the three situations listed by the CBDT where opportunity of hearing should have been granted by the Assessing Officer before making reference to the TPO. As is evident from records, no show cause notice was ever served on the assessee by the Assessing Officer before making reference to the TPO. The Assessing Officer only directed the assessee through order sheet entry to file and affidavit of Harshad Danesh Patel. We are of considered view that in the light of CBDT Instruction (supra) and the judgement referred above, the reference made to TPO by the Assessing Officer suffers from infirmity. Consequently, the said reference is liable to be set aside. In the present case, since, we have held that the Revenue has not been able to prove that there is an ‘international transaction’ between ‘associated enterprises’, setting aside reference u/s 92CA(1) and restoring the issue to Assessing Officer for allowing opportunity to the assessee of being heard after issuing notice on making reference would be an exercise in futility. In the light of our decision on ground no.1 of appeal, the ground no.2 of appeal has become academic.
In the result, appeal by the assessee is partly allowed in the terms aforesaid.
Order pronounced in the open court onTuesday, the 30th day of March, 2021.