VIDEOCON OIL VENTURES LTD,MUMBAI vs. DCIT CIR 3(3)(2), MUMBAI

आदेश / O R D E R

Per Sandeep Gosain, Judicial Member:

GROUNDS OF APPEAL The grounds of appeal set out below are without prejudice to each other: 1.1 On the facts and in the circumstances of the case and in law, learned Transfer Pricing Officer (TPO)/Assessing Officer (AO) and Dispute Resolution Panel (DRP) [the authorities below] erred in re-characterising share application money pending allotment as 'loan' and thereby e e in Maingan upward transfer pricing adjustment of Rs. 7,80,74,2921- u/s. 92CA of the Income Tax Act, 1961 towards interest chargeable on Share Application Money Pending Allotment with AEs, and the reasons assigned for doing so are wrong and contrary to the facts and circumstances of the case, provisions of the Income Tax Act, 1961 and Rules made thereunder. 1.2 On the facts and in the circumstances of the case and in law, the authorities below erred in making an upward transfer pricing adjustment in respect of interest chargeable on Share Application Money Pending Allotment without appreciating the fact that said transaction being

M/s Videocon Oil Ventures Ltd. capital in the nature, no additions could be made which is wrong and contrary to the facts and circumstances of the case, provisions of the Income Tax Act, 1961 and Rules made thereunder. 1.3 Without prejudice to the above, on the facts and in the circumstances of the case and in law, the authorities below erred in determining the Arm's length interest rate on the share application money pending allotment with its AE's @353% p.a. without appreciating the fact that share application money has been given to the foreign Associate Enterprises in Foreign Currencies, the price chargeable as interest, if any, on such money has to be based on LIBOR rate i.e. 0.905%, and the reasons assigned by him for doing so are wrong and contrary to the facts and circumstances of the case, provisions of the Income Tax Act, 1961 and Rules made thereunder. 1.4 Without prejudice to the above, on the facts and in the circumstances of the case and in law, the Transfer Pricing officer erred in adding average spread of 262.5013PS to the Libor rate 0.905% to arrive at ALP interest rate of 3.53% without issuing any show cause notice to the M/s Videocon Oil Ventures Ltd. appellant and without giving opportunity of being heard, which is wrong and contrary to the facts of the case, the provisions of Income Tax Act. 1961, and the Rules made there under. 1.5 Without prejudice to the above, on the facts and in the circumstances of the case and in law, the authorities below failed to appreciate that interest if any on account of non- allotment of shares should be levied on or after 180 days from the date of receipt of allotment money i.e. 8th January 2012 and not from 12.07.2011 (date of receipt of money), which is wrong and contrary to the facts and circumstances of the case. 1.6 On the facts and in the circumstances of the case and in law, the authorities below, failed to appreciate that there is no section in the Act which empowers to re- characterize debt to equity or vice versa. Such provisions did exist under Chapter X-A: General Anti-Avoidance Rule (GAAR')" (Section 95-103 of the Act) which provided that in the event an arrangement is treated as an "impermissible avoidance agreement", equity could be characterized as a debt or vice-versa. However, the said provisions are not applicable for this year.

M/s Videocon Oil Ventures Ltd. 2.0 On the facts and in the circumstances of the case and in law the authorities below erred in assessing interest income of Rs.3,77,57,677/- and interest expense of Rs. 5,08,11,328 I- under the head 'Income from Other Sources' instead of assessing it under the head business income and the reasons assigned by them for doing so are wrong and contrary to the facts and circumstances of the case, provisions of the Income Tax Act, 1961 and Rules made thereunder. 3.0 On the facts and in the circumstances of the case and in law the learned Assessing Officer erred in charging interest of Rs. 90,524/- u/s 234D which is wrong and contrary to the provisions of Income Tax Act 1961, and Rules made there under. The appellant craves leave to add, alter, amend and/or modify all or any of the above grounds of appeal on or before the date of hearing.

M/s Videocon Oil Ventures Ltd. activity except receipt of interest income. In the assessment proceedings, a reference under section 92CA(1) of I. T. Act, 1961 was made to the Transfer Pricing Officer, Mumbai for the determination of Arm's Length Price in relation to the international transactions entered into by the assessee company with its Associate Enterprises. The AO after obtaining the approval of the Pr.CIT-3, Mumbai. The Transfer Pricing Officer (TPO) vide order u/s.92CA(3) dated 05.11.2015 suggested an adjustment to the tune of Rs. 7,80,74,292 to the Arm's Length Price reported by the assessee in Form 3CEB. Accordingly, a draft assessment order was framed by proposing adjustment of Rs. 7,80,74,292 to the total income u/s. 92CA(3) of the Act. Against the said draft assessment order, the assessee filed its objections before the Dispute Resolution Panel — (DRP)- 2, Mumbai, which have been disposed off by the DRP-2, Mumbai vide its directions u/s.144C(5) of the Income Tax Act, 1961 dated 31.08.2016, whereby the DRP has rejected assessee's objections. Accordingly, the assessment was finalized and assessment order u/s 143(3)

M/s Videocon Oil Ventures Ltd. r.w.s. 144C(13) of the I.T. Act, 1961 dated 08.09.16 was passed.

3. Aggrieved by the said order, the assessee has filed the present appeal before us on the ground mentioned herein above.

M/s Videocon Oil Ventures Ltd. (i) Share application money is not an international transaction as defined u/s 92B of the Act; (ii)Section 92(1) has no application as no income has arisen from transaction in question; (iii)Income arising is the 'sine qua non 'for "Chapter X" to apply and in the absence of any 'real income from 'International Transaction', provisions of Section 92 cannot be invoked as Chapter X is machinery/ computation provision and not a charging section; and as such doing so is wrong and contrary to the facts and circumstances of the case, provisions of the Income Tax Act, 1961 and Rules made thereunder.

1.8 On the facts and in the circumstances of the case and in law, the authorities below erred in computing the Arm's Length Price of Rs. 7.80 crores and making an upward adjustment uls 92CA(4) r.w.s. 92C without establishing that there was an arrangement for advancing funds to its Associated Enterprise at a 'price' without appreciating that computation of Arm's Length Price cannot determine the existence of an 'International Transaction' at a price and as M/s Videocon Oil Ventures Ltd. such doing so is wrong and contrary to the facts and circumstances of the case, provisions of the Income Tax Act, 1961 and Rules made there under. 1.9 On the facts and in the circumstances of the case and in law, the action of learned Assessing Officer (AO) of making reference to TPO is bad in law as the Ld. AO has not dealt with the appellants objection that the transaction in question is not an international transaction and without reaching to a finding that the transaction in question is an International Transaction and he thereby erred in making an upward adjustment of Rs.7.80 crores on the basis of TPO's order which is bad in law as the jurisdictional conditions have not been satisfied. 1.10 The ld. Authorities below erred in not appreciating that the transaction in question is not an international transaction, as Explanation (C) with retrospective effect from 01.04.02 can have effect only from Assessment Year 2013-14 and thereby erred in making an upward adjustment of Rs. 7.80 crores. 1.11 On the facts and in the circumstances of the case and in law, the authorities below erred in holding that the transaction of share application M/s Videocon Oil Ventures Ltd. money as a loan transaction which is wrong and contrary to the facts and circumstances of the case, provisions of the Income Tax Act, 1961 and Rules made thereunder. The appellant craves leave to add, alter, amend and/or modify all or any of the above grounds of appeal on or before the date of hearing.

by the assessee are purely legal in nature and do not involve fresh investigation of facts and can be adjudicated on the basis of the facts already on record. In this regard, we found support from various judicial decisions i.e. Ashok Vardhan Birla v/s. CIT, 208 ITR 958 (Bom)(F.B.)- wherein it was held that additional ground can be raised before the ITAT even if not raised before M/s Videocon Oil Ventures Ltd. first appellate authority so long as it is in respect of subject matter of entire tax proceedings. In JBB Srinivasan, Vs. The Secretary of Government of Tamil Nadu,

92. STC, 631 (Mad.). - It was held that where the omission to raise the additional ground is not willful, but inadvertent, the appellant should be allowed to file additional ground. Similarly, Hon’ble Supreme Court has in the case of National Thermal Power Co., 229 ITR 383, decided that additional ground arising from facts on record can be raised lbr the first time before appellate authorities. In this case the Hon’ble Supreme Court had applied the ratio of decision in Jute Corporation of India, 187 JTR 688 (S.C.). The Hon’ble Apex Court has observed on page No. 386 of its order that "The power of Tribunal in dealing with appeals is thus expressed in the widest possible terms. The purpose of assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law".

M/s Videocon Oil Ventures Ltd.

M/s Videocon Oil Ventures Ltd. VIII. The recharacterisation of Share Application Money as a loan is bad in law. IX. The Computation mechanism fails as no price exists. X. A Secondary Adjustment cannot he made in the absence of a statutory provisio.

Although, the assessee has raised many grounds of appeal but since the legal grounds raised by the assessee goes to the roots of the case and challenges the very jurisdiction of the AO for referring the case, to the TPO, therefore we have decided to first of all deal with legal grounds in additional grounds raised by the assessee.

Additional Ground No. 1.7 to 1.11 8. All the above additional ground raised by the assessee are inter related and inter connected and challenges the jurisdictional condition which touches the roots of the case, therefore we thought it fit to dispose of the same thorough the present consolidated order.

M/s Videocon Oil Ventures Ltd.

2. Capital financing will cover borrowing, lending or guarantee transactions. Acquisition of shares/ Share Application Money is not covered under capital financing.

10.1 Ld. AR further submitted that during the course of assessment, reference was made by AO u/s. 92CA(1) to Addl. Commissioner of Income Tax [CIT] - Transfer Pricing Officer (TPO) on 17.03.2015. The assessee vide its letter dated 13.06.2017 has requested the AO to provide the copy of M/s Videocon Oil Ventures Ltd. reference made to Transfer Pricing Officer [TPO] u/s 92CA(1), satisfaction recorded by AO and approval of CIT for making said reference, especially when the assessee had objected to consider the transaction as International Transaction. As per learned AR, while providing the documents, the Id. AO has categorically specified in his letter dated 13.06.2017, that there is no requirement of recording separate satisfaction of AO where the value of international transactions is more than Rs. 15 crores. The relevant extract of AO's letter was as under:

5. As regards your query regarding whether satisfaction for making reference has been recorded, as per the CBDT circular in force, all the cases - wherein the value of international transactions is more than Rs. 15 crores were required to be referred to the TPO for determination of Arm's Length Price and no separate satisfaction was required to be recorded by the A. O, which may please be noted M/s Videocon Oil Ventures Ltd. 10.2 As per learned AR this is also evident from the letter of reference u/s 92CA(1) of the Act made to the Addl.CIT (TPO)- 4(3) wherein he has simply quoted the provisions of the Section 92CA which reads as under:

"3. I consider it necessary and expedient to refer, all the transactions contained in form No.SCEB, u/s 92CA(1) of the Act, for computation of the Arm's Length Price. Therefore, all the international transactions mentioned in form No. 3CEB are referred to you for computation of the arm's length price. " 10.3 Further, our attention was also invited to letter dated 16.03.2015 from the office of CIT conveying the approval which does not contain his satisfaction in the said approval. 10.4 Ld. AR further submitted that before invoking the provisions of section 92, the required jurisdictional requirements were not complied with. In this regard, Ld. AR drawn our attention to the provision of section 92CA of the I.T. Act.

M/s Videocon Oil Ventures Ltd.

11.3 It was submitted by Ld. DR that in the background of these facts, the TPO concluded that the impugned transaction was actually a loan transaction and accordingly imputed interest on the same. As the amounts were advanced in US$, the TPO applied Libor+262.50 BPS. The same came to 3.53%.

M/s Videocon Oil Ventures Ltd. The TPO determined the Arm's Length interest at Rs.7.80 crores. 11.4 It was submitted by Ld. DR that before the DRP, the assessee furnished two pages of the AE's Balance sheet. It was found that the authorized share capital of the AE as disclosed in its Balance Sheet as on 31/12/2013 was US$ 205 million. As against the same, the AE had already issued shares to the extent of US$ 203 million (before September 2016). Therefore it was found that even the authorized share capital of the AE was not adequate to issue shares equivalent to share application money of US$ 68 million. In the light of this additional fact, the DRP confirmed the ALP adjustment on account of interest by concluding that the impugned transaction was in fact a loan transaction and not share application. 11.5 The Ld. DR further submitted that the transaction conclusively establish that the impugned transaction was always intended only as a loan and never as a share application. They are: (i) The authorized share capital of the AE was almost fully exhausted and therefore there was no scope for issuing shares against the share application money. (ii) The entire amount advanced as share application money has in fact being returned (iii) No shares have been allotted towards any part of the sum of US$ 68 million.

M/s Videocon Oil Ventures Ltd. 11.6 As regards provision of opportunity before making reference, it was submitted by learned DR that though the Assessing Officer did not provide an opportunity before making the reference, the transfer pricing officer had provided full opportunity to the assessee before making the transfer pricing adjustment.

12.3 This is also evident from the letter of reference u/s 92CA(1) of the Act made to the Addl.CIT (TPO)- 4(3)

M/s Videocon Oil Ventures Ltd. wherein he has simply quoted the provisions of the Section 92CA which reads as under:

3. I consider it necessary and expedient to refer, all the transactions contained in form No. SCEB, u/s 92CA(1) of the Act, for computation of the Arm's Length Price. Therefore, all the international transactions mentioned in form No. 3CEB are referred to you for computation of the arm's length price.

12.4 Further, letter dated 16.03.2015 from the office of CIT conveying the approval does not contain his satisfaction in the said approval. 12.5 Before we decide this legal issue as to whether AO is required to give opportunity to the assessee before making a reference to TPO, it is necessary to evaluate and consider the mandatory provisions of section 92CA of the I.T. Act before the amendment and after the amendment w.e.f. 1.06.2007 which is reproduced below. Since the relevant assessment year under consideration is A.Y.2012-13, we are governed by the amended provisions of law which were effect from 01/06/2007.

M/s Videocon Oil Ventures Ltd. Before amendment in section 92CA, it reads as under:- "Reference to Transfer Pricing Officer. 92CA. (1) Where any person, being the assessee, has entered into an international transaction or specified domestic transaction in any previous year, and the Assessing Officer considers it necessary or expedient so to do, he may, with the previous approval of the Principal Commissioner or commissioner, refer the computation of the arm's length price in relation to the said international transaction or specified domestic transaction under section 92C to the Transfer Pricing Officer.

('4) On receipt of the order under sub-section (3), the Assessing Officer shall proceed to compute the total income of the assessee under sub-section ('4) of section 92C having regard to the arm's length price determined under sub- section (3) by the Transfer Pricing Officer.

After amendment in section 92CA(4) w.e.f. 01.06.2007 in Finance Act 2007 it reads as under:- "('4) On receipt of the order under sub-sec/ion ('3), the Assessing Officer shall proceed to compute the M/s Videocon Oil Ventures Ltd. total income of the assessee under sub-section (4 of section 92C in conformity with the arm's length price as so determined by the Transfer Pricing Officer. Thus after careful analysis of the above provisions, we find that initially Before amendment, there were two requirements which must be satisfied before the AO can refer the computation of the ALP to the TPO. Firstly, the AO “consider it necessary and expedient so to do” and secondly the AO will necessarily have to given opportunity to the assessee after receiving the report of the TPO and before he finalizes the assessment, computing the total income. The AO was not bound to accept the ALP as determined by the TPO, because as per section 92CA(4) before amendment the AO was to proceed to compute the total income of the assessee having regard to the ALP determined by the TPO. And in this way, assessee would get a hearing after the TPO passed the order and the AO was empowered to reject the TPO’s findings on hearing the assessee and grant relief.

M/s Videocon Oil Ventures Ltd. But this premise is no longer valid After the amendment to section 92CA(4) which now reads as under:- "('4) On receipt of the order under sub-sec/ion ('3), the Assessing Officer shall proceed to compute the total income of the assessee under sub-section (4of section 92C in conformity with the arm's length price as so determined by the Transfer Pricing Officer. Thus in this way, prior to the amendment, the AO was obliged to give an opportunity of being heard to the assessee after the receipt of the TPO’s report. However after the amendment, the AO has no choice but to pass the order in conformity with the order of the TPO. Hence in this way, if the arguments of the Revenue is considered that, no hearing is required to be given to the assessee before referring the matter to the TPO, then in that eventuality the assessee would be deprived of the opportunity of being heard on Both occasions i.e. before the reference is made to the TPO as well as after the TPO makes his report. Which to our mind is an absurdity and any interpretation that leads to an absurdity should he eschewed.

M/s Videocon Oil Ventures Ltd. Our above view has also got strengthened by the CBDT Instruction No 15 of 2015 dated 16.10.15 wherein the above legal position has also been recognized which reads as under:-

"However, in the following situations, the AO must, as a jurisdictional requirement, record his satisfaction that there is an income or a potential of an income arising and /or being affected on determination of the ALP of an international transaction before he proceeds to determine the ALP under subsection (3) of section 92C of the Act or to refer the matter to the TPO to determine the ALP under sub-section (7) of section 92CA of the Act: (a) where the taxpayer has not filed the Accountant's report under section 92E of the Act but international transactions undertaken by it come to the notice of the AO; (b) where the taxpayer has not declared one or more international 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 (c) where the taxpayer has declared the international transaction or transactions in the Accountant's report filed under section 92E of the M/s Videocon Oil Ventures Ltd. Act but has made certainqualifying remarks to the effect that the said transaction or transactions are not international transactions or do not impact the income of the taxpayer. In all the above situations, the AO must provide an opportunity of being heard to the taxpayer before recording his satisfaction or otherwise.

We further get support from the landmark judgment of Hon’ble Jurisdictional High Court in the case of Vodafone India Services P. Ltd. vs. Union of India & Others 361 ITR 531 (Bom) wherein, this principle of jurisdictional requirement has been set out. The relevant observations of Hon'ble Bombay High Court are at para 32-41, which read as under: "32. it is clear that in view of Section 92(1) , there must be income arisingand/or affected or potentially arising and/or affected by an International Transaction for the purpose of application of Chapter X. This would appear to be in the nature of jurisdictional requirement and the Assessing officer must be satisfied that there is an income or a potential of an income arising and/or being affected on determination of an ALP before he proceeds further in determining the ALP or referring the issue to the TPO to determine the ALP. In this case, we find that the petitioner has M/s Videocon Oil Ventures Ltd. from the very beginning been challenging the jurisdiction to apply Chapter X on the ground that no income arises and/or is affected or potentially arises and/or is affected on account of issue of its shares to its holding company, The Assessing Officer does not deal with this objection/issue before referring the matter to the TPO. The TPO does not deal with the above objection on the ground that in terms of Section 92CA his mandate is only to compute the ALP in relation to the International Transaction. The TPO in the impugned order dated 28 January 2012 meets the petitioner’s objection by stating that the same would be dealt with by the Assessing Officer. However, when the same objection was raised before the Assessing Officer post the order of the TPO, the Assessing Officer does not consider the same in the impugned draft assessment order dated 22 March 2013 on the ground that in view of Section 92 CA ('4), the Assessing Officer is obliged to pass an order in conformity with the ALP determined by the TPO. This jurisdictional issue has to be dealt with either by the TPO or the Assessing Officer when specifically raised by the petitioner/assessee.

M/s Videocon Oil Ventures Ltd. "Two aspects require to be taken note of in this context. The Assessing Officer will necessarily have to give an opportunity to the assessee after receiving the report of the TPO and before he finalises the assessment computing the total income. Secondly, the provisions do not mandate that the Assessing Officer is bound to accept the ALP as determined by the TPO. And for good reason because the Assessing Officer has himself not made up his mind at the stage about the ALP. He has, in a sense, only 'outsourced' this exercise to the TPO. He can always be persuaded by the assessee at that stage to reject the TPO's Report and proceed to still determine the ALP himself. It must be recalled that it is the Assessing Officer who is the authority to finalise the assessment and that power cannot be usurped, as it were, by the TPO or any other authority contrary to the scheme of the Act. If on the other hand, one were to interpret the provisions to require the Assessing Officer to first form a considered opinion on the ALP before referring the matter to the TPO, then the Assessing Officer will thereafter have no option but accept the report of the TPO and to that extent the Assessing Officer's final say on the ALP while computing the total income gets diluted. By preserving the power of the Assessing Officer to determine the ALP even after (he determination by (he TPO, full effect can be given to the words "having regard to " occurring in both sections 92C(4)and92CA(4)." Thus, the conclusion that no hearing was required before referring the matter to the TPO was based on the premise/that the assessee would get a hearing after the TPO passed the order. The AO was empowered to reject the TPO's findings on hearing the assessee and grant relief. But this M/s Videocon Oil Ventures Ltd. premise is no longer valid after the amendment to Section 92CA(4) which now reads as follows:- Section 92CA(4) after to amendment in Finance Act "(4) On receipt of the order under sub-section (3), the Assessing Officer shall1 proceed to compute the total income of the assessee under sub-section (4) of section 92C in conformity with the arm's length price as so determined by the Transfer Pricing Officer.

Thus, after the amendment to Section 92CA(4) the AO was not bound to give an opportunity of being heard after receipt of TPO's report. What is the consequence of this change in the law?

Prior to the amendment, the AO was obliged to give an opportunity of being heard to the assessee after receipt of order of TPO. Thus, assessee could avail of the opportunity to convince the AO that ALP was not the price determined by the TPO. However, after the amendment, the AO has no choice but to pass the order in conformity with the order of TPO. Thus if the Revenue is right in its contention that no hearing is required to be given before referring the matter to the TPO the M/s Videocon Oil Ventures Ltd. assessee is deprived of opportunity of being heard both before the reference is made to the TPO as well as after the TPO makes his report. This is an absurdity. Any interpretation that leads to an absurdity should be eschewed. Therefore, as the law stands today the opportunity of a hearing must be made before the reference is made to the TPO. We are also of the view that violation of jurisdictional issue cannot be cured even by the consent of the affected parties. The case of violation of natural justice constitutes an „irregularity‟ and a case of violation of jurisdictional issue makes proceedings „void‟. Our this view stands fortified and gets strengthened by the judgment of Hon’ble Supreme Court in case of Deepak Agro vs. State of Rajasthan And Others, [(2008) 7 Supreme Court Cases 748 wherein Court held as under:- “17. All irregular or erroneous or even illegal orders cannot be held to be null and void as there is a fine distinction between the orders which are null and void and orders which are irregular, wrong or illegal. Where an authority making order lacks inherent jurisdiction, such M/s Videocon Oil Ventures Ltd. order would be without jurisdiction, null, non est and void ab initio as defect of jurisdiction of an authority goes to the root of the matter and strikes at its very authority to pass any order and such a defect cannot be cured even by consent of the parties. (See: Kiran Singh & Ors. Vs. Chaman Paswan & Ors.1). However, exercise of jurisdiction in a wrongful manner cannot result in a nullity - it is an illegality, AIR 1954 SC 340 capable of being cured in a duly constituted legal proceedings.” Hence in these circumstances, not providing an opportunity to the assessee before referring the matter to TPO is a jurisdictional issue and thus the violation of same leads to an order which is not sustainable in law and the same is invalid /void. Hence, the orders passed by AO are bad in law and therefore stands quashed. In this view of the matter, the additional grounds raised by the assessee are allowed.

13. Since, the very basis for passing the order by AO has been held to be invalid/void, we are of the view that the other grounds of appeal at serial no. 1.1 to 3.0 raised by the assessee against the merits of the demand requires no adjudication at this stage.

M/s Videocon Oil Ventures Ltd.