M/S. ASIAN HONDA MOTOR CO. LTD.,,NEW DELHI vs. DCIT, INTL. TAXATION, NEW DELHI

O R D E R PER PRASHANT MAHARISHI, A. M.

Page 4 of 19 decreasing the overall incidence of tax in India in context of Indian payer/associated enterprises. Ground 6: That on the facts and in law, the TPO/DRP miserably failed to appreciate that the transaction relating to sale of raw material to associated enterprises in India along with the applicable interest on delayed payment had been found to meet the ALP test by applying the combined transaction approach in the assessment proceeding of Indian associated enterprises and as such no adjustment could be made in the hands of the Appellant company. Ground 7: That on the facts and in law, the TPO/DRP fail to appreciate that it was not within their jurisdiction to question the commercial expediency of the transaction where the Appellant had selected to apply SIBOR on the transaction under consideration and it was not for the TPO to impose that LIBOR not being the commercial between the parties. Ground 8: Without prejudice, that on facts and in law, the TPO/ DRP erred in not considering that the risk/reward matrix, commercial rational and the business expediency existed in case of charging interest on business credit extended to the AE in the normal course of business is completely different from the case where the loan is extended by bank in typical financing transaction. The TPO/DRP failed to appreciate that in the Appellant's case the purpose is not to earn interest income form such extended credit. Thereby erred in considering the PLI (Profit level Indicator) used by Banks in their normal course of lending/ borrowing business as comparable uncontrolled price (CUP) for determining the Arm's Length price. Ground 9: That on facts and in law, the AO/ TPO/DRP has grossly erred in law and facts in initiating the penalty under section 271BA, 271 AA and 271G of the Act and alleging that the Appellant has not complied with the provision of aforesaid sections. It is imperative to mention that the Appellant had duly submitted all the information, to the extent available and had filed all the necessary information on record and in any case has M/s. Asian Honda Motor Co. Ltd. Vs. DCIT, Page 5 of 19 made full and complete disclosure as required under the Income Tax Act, 1961. Ground 10: Without prejudice: that on facts and in law, the TPO/ DRP erred in not applying the Proviso to section 92C of the Act and has failed to allow the Appellant the benefit of downward variation of 5 percent in determining the ALP.”

4. Ground No. 1 of the appeal is general in nature and no specific arguments were advanced by the parties before us, therefore same is dismissed.

5. Ground No. 2 of the appeal is a legal ground contesting that order passed by the ld. TPO is time barred and liable to be quashed. Before us the ld AR contends that the order passed by the ld TPO is time barred under the provisions of section 153 rws 92CA(3) of the Act and hence it is liable to be quashed. He referred to the provisions of section 153(1) and submitted that reference u/s 92CA (3) of the act was received by the ld. TPO on 28.12.2011 and therefore date of limitation for passing of the order by ld. TPO was 27.11.2014 which was passed on 31.12.2014, therefore, the order passed by the ld TPO is barred by the limitation. He further excluded the time period pertaining to the application before AAR and information sought as per DTAA and consequently excluded 668 days for the same. Therefore according to him the order of Transfer Pricing Officer is barred by limitation and therefore the assessment made pursuant to that does not survive. He submitted that On the similar facts for AY 2010-11 in wherein, identical issue has been decided in case of Honda Trading Corporation Japan. He specifically relied on para no. 6.1 to 8 under caption heading „B‟ at page no 35 to 46 of that order. He M/s. Asian Honda Motor Co. Ltd. Vs. DCIT, Page 6 of 19 also submitted a chart showing sequence of events to demonstrate his point of view.

6. The ld DR submitted that the order passed by the TPO is not barred by the limitation and even otherwise he relied upon the order of Hon‟ble Supreme Court in case of Deepak Agro Foods Vs. State of Rajasthan dated 11.07.2008 and submitted that such illegality is capable of being cured and it is merely a case of irregularity in assessment proceedings by the ld AO and TPO who were not bereft of the authority to assess the appellant and therefore the Tribunal is duty bound to cure this defect. However he did not dispute the dates and facts mentioned in the chart submitted by the ld AR.

8. According to the provisions of section 92CA (3A) of the act

[(3A) Where a reference was made under sub-section (1) before the 1st day of June, 2007 but the order under sub-section (3) has not been made by the Transfer Pricing Officer before the said date, or a reference under sub-section (1) is made on or after the 1st day of June, 2007, an order under sub-section (3) may be made at any time before sixty days prior to the date on which the period of limitation referred to in section 153, or as the case may be, in section 153B for making the order of assessment or reassessment or recomputation or fresh assessment, as the case may be, expires M/s. Asian Honda Motor Co. Ltd. Vs. DCIT, Page 7 of 19 Admittedly the reference to ld TPO was made after 1-6-2007 Therefore the provisions of this section are applicable to the facts of the case. Accordingly ld. TPO may make order under this section at any time before 60 days prior to the date of expiry of limitation as per section 153 (1) of the act as applicable in the present case.

Page 8 of 19 (i) was made before the 1st day of June, 2007 but an order under sub-section (3) of that section has not been made before such date; or (ii) is made on or after the 1st day of June, 2007, the provisions of clause (a) shall, notwithstanding anything contained in the first proviso, have effect as if for the words "two years", the words "thirty-three months" had been substituted:] 42b[Provided also that in case the assessment year in which the income was first assessable is the assessment year commencing on the 1st day of April, 2009 or any subsequent assessment year and during the course of the proceeding for the assessment of total income, a reference under sub-section (1) of section 92CA— (i) is made before the 1st day of July, 2012, but an order under sub-section (3) of that section has not been made before such date; or (ii) is made on or after the 1st day of July, 2012, the provisions of clause (a) shall, notwithstanding anything contained in the first proviso, have effect as if for the words "two years", the words "three years" had been substituted.] [Extracted from taxmann.com as amended by the Finance Act 2012] Therefore accordingly the order u/s 143(3) for AY 2009-10 should have been passed by 31.3.2013 and further extended by the time taken for various reasons as per explanation (1) to section153 of the act. 10. Based on the facts narrated above we hereby tabulate the relevant dates pertaining to the proceedings before the various authorities for the impugned AY. Sl. Particulars Date Remarks No. Date of filing return of 20.08.2010 1 M/s. Asian Honda Motor Co. Ltd. Vs. DCIT,

Page 9 of 19 income Application u/s 245Q(1) 29.06.2011 2 before AAR Date of reference 28.12.2011 3 received by TPO for determining ALP Date of rejection of the 15.05.2012 As the original 4 application of the application was applicant by AAR made on 29.06.2011 and was disposed off on 15.05.2012 total no of 322 days are required to be excluded as per clause No. VI of explanation 1 to section 153 of the Act. The date on which 11.12.2013 5 request to competent authority of Japan for exchange of information Date on which the ld 20.11.2014 According to the 6 TPO received the clause (viii) of information vide letter Explanation 1 to dated 07.11.2014 section 153 the period excluded from the date of reference made ending with date on which the information last received or a period of one year whichever is less. Here the reference was first sent on 11.12.2013 as per Sl No. 3 and ended on 20.11.2014 resulting into exclusion of 344 M/s. Asian Honda Motor Co. Ltd. Vs. DCIT, Page 10 of 19 days. Date by which the order 28.01.2015 The date before 7 should have been passed which the order as per the explanation 1 should have been of section 153 passed according to section 153 was 31.03.2013. The date of 31.03.2013 is required to be extended by a period 322 days as per Sl No. 4 and 344 days as per Sl No. 6 of the chart which extends the date for passing of the order by 668 days which makes the time limit of passing of the order of 31.03.2013 extended to 28.01.2015. [though in the chart date mentioned by ld AR is 26.01.2015 but according to us it is 28.01.2015] The date by which the 29.11.2014 The TPO should 8 TPO should have passed have passed an the order being 60 days order before 60 days prior to the date on from the date of which the period of extended time limit limitation referred to u/s as per Sl. No. 7 153 from passing which is 26.01.2015 assessment order i.e. on or before expires i.e. 60 days prior 29.11.2014. [though to date mentioned at Sl. in the chart date No. 7 mentioned by ld AR is 27.11.2014 but according to us it is M/s. Asian Honda Motor Co. Ltd. Vs. DCIT, Page 11 of 19 29.11.2014] Date of passing of the 31.12.2014 Barred by limitation 9 order by the ld TPO by 31 days

M/s. Asian Honda Motor Co. Ltd. Vs. DCIT, Page 13 of 19 6.4. The ld. DR vehemently contended that the use of the word `may‟ in this provision for the passing of the order by the TPO within a period of 60 days of the limitation set out in section 153 indicates that the adherence to this time limit is not mandatory. He contended that even if the order is passed after the period of 60 days from the period of limitation as given u/s 153, still it would be treated as having been passed within time. This argument was countered by the ld. AR. 6.5. There is no doubt that the legislature has used the word `may‟ in sub-section (3A) of section 92CA. There is further no doubt that the ambit of the word `may‟ is different from the word `shall‟. Whereas, ordinarily the use of the word `shall‟ signifies mandatory compliance, the word „may‟ signifies directory compliance. But at times, the word `may‟ can also be read as `shall‟ and vice versa. In fact, all depends upon the context and the background of the provision in which such a word is used. 6.6. Section 127 deals with the power to transfer cases. Sub-section (1) of this provision provides that : `The Director General or Chief Commissioner or Commissioner may, after giving the assessee a reasonable opportunity of being heard in the matter, wherever it is possible to do so, and after recording his reasons for doing so, transfer any case from one or more Assessing Officers subordinate to him (whether with or without concurrent jurisdiction) to any other Assessing Officer or Assessing Officers (whether with or without concurrent jurisdiction) also subordinate to him‟. Dispute arose in Sahara Hospitality Ltd. vs. CIT (2013) 352 ITR 38 (Bom) as to whether or not giving the assessee a reasonable opportunity of being heard before the transfer of case by the Chief Commissioner, in the backdrop of the use of the word `may‟ in the provision, be considered as mandatory. The Hon‟ble Bombay High Court has held that the word `may‟ in section 127 should be read as `shall‟ and hence the granting opportunity to the assessee is mandatory.

M/s. Asian Honda Motor Co. Ltd. Vs. DCIT, Page 14 of 19 6.7. Section 16 of the Wealth-tax Act, 1957 deals with the assessment of wealth. Section 16A having marginal note of `Reference to Valuation Officer‟ provides through sub-section (1) that : `For the purpose of making an assessment (including an assessment in respect of any assessment year commencing before the date of coming into force of this section) under this Act, where under the provisions of section 7 read with the rules made under this Act or, as the case may be, the rules in Schedule III, the market value of any asset is to be taken into account in such assessment, the Assessing Officer may refer the valuation of any asset to a Valuation Officer- (a) in a case where the value of the asset as returned is in accordance with the estimate made by a registered valuer if the Assessing Officer is of opinion that the value so returned is less than its fair market value; (b) in any other case, if the Assessing Officer is of opinion- (i) that the fair market value or the asset exceeds the value of the asset as returned by more than such percentage of the value of the asset as returned or by more than such amount as may be prescribed in this behalf; or (ii) that having regard to the nature of the asset and other relevant circumstances, it is necessary so to do‟. In Raj Paul Oswal vs. CWT (1988) 171 ITR 489 (P&H), there arose a quarrel as to the meaning of the word `may‟ used in section 16A in the context of making reference to the Valuation Officer. Settling the controversy, the Hon‟ble High Court held that the word `may' used in section 16A(1)(b), should be read as `shall'. It held that if the legislative intent had been to accord total discretion to the WTO to make a reference to the Valuation Officer or not in cases which were covered by cls. (a) & (b) of sub-s. (1) of s. 16A of the WT Act, then there was no necessity of providing the guidelines in cl. (a) or in sub-cls. (i) and (ii) of cl. (b) of sub-s. (1) of s. 16A. It was, therefore, held that the legislature by prescribing the contingencies, in which, by implication, it would not be necessary to make a reference, also again by necessary implication be taken to have intended that the reference to Valuation Officer was must if the given contingencies did not exist. In this M/s. Asian Honda Motor Co. Ltd. Vs. DCIT, Page 15 of 19 regard, the Hon‟ble High Court observed that : `There is no doubt about the fact that the use of expression "may" and "shall" to some extent serves an indicia to the intention of the legislature and helps in deciding as to whether the given requirement is directory or mandatory in character, but the use of expression "may" or "shall" is never considered decisive in that regard‟. It was thus held that the moment the estimated value exceeded the returned value of the asset by more than what is envisaged by r. 3B, then the WTO had no option, but to make a reference and he is not to wait for a request from the assessee to make a reference. Similar view has been expressed by the Hon‟ble Delhi High Court in Sharbati Devi Jhalani vs. CWT & Ors. (1986) 159 ITR 549 (Del). It is vivid from the above discussion that the use of word `may‟ or `shall‟ in a provision is not conclusive of its mandatory or directory nature. One needs to go through the text of the provision and the context in which such a word has been used. 6.8. Reverting to section 92CA, we find that the Finance Act, 2007 inserted sub-section (3A) carrying the time limit of sixty days for passing of the order by the TPO before the expiry of time limit for completion of assessment by the AO u/s 153. Despite the use of the word `may‟, the time limit for passing the order by the TPO is mandatory, as in the otherwise situation of the TPO having been allowed more time by implication, say of three months or more, could at that time have frustrated the provisions of section 153 for the passing of the assessment order by the AO. Thus we have no hesitation in holding that the use of the word `may‟ in sub-section (3A) of section 92CA is to be construed as `shall‟, thereby making this time limit as mandatory and not directory. As such, it is held that the TPO is bound by the given time limit for passing of his order. 6.9. Having held that the word `may‟ in section 92CA(3A) should be read as `shall‟, we once again note that prior to the insertion of section 144C by the Finance Act, 2009, the time limit for completion of assessment was contained in section 153 and accordingly the time limit for the passing of the order by the TPO was also set out M/s. Asian Honda Motor Co. Ltd. Vs. DCIT, Page 16 of 19 accordingly in section 92CA w.r.t. the time limit for the completion of assessment as per section 153. However, with the insertion of section 144C, the time limit for the completion of assessment, or in other words, for passing of the final assessment order, stood shifted to sub- sections (4) or (13) of section 144C and got detached from section 153. Along with this, passing of draft order also became mandatory, for which we have held above that the same is required to be passed within a reasonable time and it has got no relation with the time limit given in section 153. When the position is such that the draft order has to be passed independent of the time limit given in section 153, there appears some logic in not continuing with the time limit for the passing of the order by the TPO tagged with the time limit given in section 153. It has led to incoherence in the provisions. This position can be set right only with a suitable legislative amendment. 6.10. Having held that the time limit given in sub-section (3A) of section 92CA is mandatory for the passing of the order by the TPO, let us find out the time available with the TPO for the passing of his order. It has been noticed above that the time limit as per section 153(1) read with the third proviso and clause (viii) of the Explanation to the section, comes at 7th June, 2014. Period of 60 days prior to such time limit coming as per section 153, available with the TPO for passing his order, comes to an end on 8th April, 2014. As against this, the order was actually passed by the TPO on 31st May, 2014. Thus, the order passed by the TPO is patently time barred. C. Consequences of valid draft order and TPO’s time barred order 7. The ld. AR argued that since the draft order as well as the order of the TPO were time barred, the final assessment order passed by the AO was liable to be set aside. We have held above that the draft order was passed within time and only the order of the TPO is time-barred. When an order is passed without jurisdiction or beyond the permissible time, it is M/s. Asian Honda Motor Co. Ltd. Vs. DCIT, Page 17 of 19 considered as null and void. The effect of passing a null and void order is that it is considered as non est, meaning thereby, that it entails all the consequences of not having been passed at all and is ignored for all practical purposes. The Hon‟ble Madras High Court in Vijay Television (P.) Ltd. vs. DRP (2014) 369 ITR 113 (Mad) considered a case in which the assessment order was directly passed without routing through draft order or DRP. The Hon‟ble Court held it to be a noncurable defect and resultantly the assessment was quashed. It was held that when there is an omission on the part of the AO to follow the mandatory procedure prescribed under the Act, such an omission cannot be termed as a mere procedural irregularity and it cannot be cured. Extantly, we are confronted with a situation in which the draft order has been passed in time but the lapse has come in the passing of the order by the TPO. The consequence of the above scenario is that the passing of a valid and properly timed draft order cannot lead to the setting aside of the final assessment order. However the passing of the time barred order by the TPO, which is again a mandatory procedure prescribed under the Act, would be a non-curable defect, having the consequence as if it was not passed. In such circumstances, though the final assessment order would be saved but the addition on account of transfer pricing adjustment arising from the determination of the ALP of the international transactions by the TPO as emanating from his time barred order, would be unsustainable. We hold accordingly and direct the deletion of addition on account of transfer pricing adjustment made in the final assessment order.