Income Tax Appellate Tribunal - Mumbai
Videocon Oil Ventures Ltd, Mumbai vs Dcit Cir 3(3)(2), Mumbai on 20 September, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL "K"
BENCH, MUMBAI
BEFORE SHRI R. C. SHARMA, AM &
SHRI SANDEEP GOSAIN, JM
आयकरअपीलसं ./ I.T.A. No. 6630/Mum/2016,
(निर्धारणवर्ा / Assessment Year: 2012-13)
Videocon Oil Ventures Ltd DCIT Cir 3(3)(2)
बिधम/
171C Mittal Court, Nariman Mumbai
Point, Mumbai Vs.
स्थायीलेखासं ./ जीआइआरसं ./ PAN/GIR No. AADCV1810B
(अपीलाथी/Appellant) : (प्रत्यथी / Respondent)
अपीलाथीकीओरसे / Appellant by : Shri Arvind Sonde
प्रत्यथीकीओरसे /Respondentby : Mrs. MalathiSridharan
सुनवाईकीतारीख/
: 21/06/2017
Date of Hearing
घोषणाकीतारीख /
: 20/09/2017
Date of Pronouncement
आदे श / O R D E R
Per Sandeep Gosain, Judicial Member:
The present Appeal filed by the assessee is against the order of Assessing Officer (AO) u/s 143(3) r.w.s. 144C(13) of I.T. Act dated 08.09.16 passed in pursuance of the directions issued by the Dispute Resolution Panel(DRP) u/s 144C(5) of 2 I.T.A. No. 6630 /Mum/2016 M/s Videocon Oil Ventures Ltd.
the Act vide order dated 31.08.16. on the grounds mentioned herein below:-
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 3 I.T.A. No. 6630 /Mum/2016 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 4 I.T.A. No. 6630 /Mum/2016 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.
5
I.T.A. No. 6630 /Mum/2016 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.
2. The brief facts of the case are that the assessee company is engaged in exploration, extraction, production of all kinds of oils including petroleum crude oil. For the year under consideration, the assessee has no business 6 I.T.A. No. 6630 /Mum/2016 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) 7 I.T.A. No. 6630 /Mum/2016 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.
4. During the course of arguments, the Ld. AR filed an application dated 15.05.17 thereby seeking leave of the Tribunal to raise additional grounds of appeal Under Rule 11 of Appellate Tribunal Rules, 1963. Vide the above application, Ld. AR submitted that the additional grounds urged do not involve fresh investigation of facts and can be adjudicated based on the facts already on record. In this context, Ld. AR relied upon the several judicial decisions.
The additional grounds are reproduced below:-
ADDITIONAL GROUNDS OF APPEAL 1.7 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) erred in making transfer pricing adjustment of Rs.7,80,74,292/- without appreciating that:8
I.T.A. No. 6630 /Mum/2016 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 9 I.T.A. No. 6630 /Mum/2016 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 10 I.T.A. No. 6630 /Mum/2016 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.
5. On the other hand, Ld. DR contested the said request of the assessee and argued for dismissal of the said application.
6. We have heard the counsels for both the parties on this application for seeking leave to raise additional grounds. We find that the proposed additional grounds raised 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 11 I.T.A. No. 6630 /Mum/2016 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".
12
I.T.A. No. 6630 /Mum/2016 M/s Videocon Oil Ventures Ltd.
7. Considering the arguments of the parties as well as factual position and while taking into consideration the above mentioned judicial pronouncements, we allow the assessee to raise additional grounds of appeal and thus the additional grounds raised by the assessee are admitted for disposal on merits.
Both the parties had filed their respective exhaustive written submissions. Ld. AR has precisely raised all the grounds thereby challenging the validity of the impugned order by raising the following grounds:-
I.There is no income arising from an international transaction II.Income which could have, but was not earned is not chargeable to tax.
III.Chapter X is not a charging provision, it is a machinery provision.
IV. There is no international transaction for a price.
V. There is lack of Jurisdiction.
VI. The satisfaction of the CIT for granting approval for the reference to the TPO not having been produced is bad in law. In the alternative it is mechanical and bad in law for that reason. VII. Explanation (i)(c) to section 92B of the Act does not apply to the transaction of advancing of share application money by the appellant.13
I.T.A. No. 6630 /Mum/2016 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.
14
I.T.A. No. 6630 /Mum/2016 M/s Videocon Oil Ventures Ltd.
9. We have heard the counsels for both the parties and we have also perused the material placed on record as well as the orders passed by revenue authorities.
10. The Ld. AR while relying upon its written submissions argued that for A.Y.2012-13, the assessee had filed, the Form No. 3CEB - which is at P.B. Pg-15 to 23. In this Form No. 3CEB, it disclosed Share Application Money invested in its subsidiary outside India, namely Videocon Hydrocarbon Holdings Ltd. (VHHL) by way of abundant caution with a specific note that this investment in share application money is NOT an International Transaction referred to in Section 92B of the Income tax Act, 1961 ('the Act') (Refer Page 23 of Paper Book-I). The said note reads as under:
"Notes: -
Though the above transaction has been included above, the assessee contends as under:
1.The Investment in share capital and share application money of subsidiaries outside India are transactions not in the nature of transactions referred to in Section 92B of the Act and in the absence of income from the transaction, transfer pricing provisions are not applicable. Transfer 15 I.T.A. No. 6630 /Mum/2016 M/s Videocon Oil Ventures Ltd.
pricing provisions only apply if there is chargeable income resulting from the transaction. Capital investments, which do not create chargeable income, cannot therefore be brought within the scope of transfer pricing provisions. Reliance is placed on circular No. 14 dated 22/11/2011. Reliance is also placed on the decision of AAR in Amiantit International Holdings Ltd. (2010) 322 ITR 678 (AAR).
2. Capital financing will cover borrowing, lending or guarantee transactions. Acquisition of shares/ Share Application Money is not covered under capital financing.
3. Thus, Amount remitted as Share Application Money is a capital transaction and accordingly, provisions of section 92B are not applicable to the said remittance and in the absence of any income from the transaction, transfer pricing provisions are not applicable." 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 16 I.T.A. No. 6630 /Mum/2016 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"17
I.T.A. No. 6630 /Mum/2016 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.
18
I.T.A. No. 6630 /Mum/2016 M/s Videocon Oil Ventures Ltd.
11. On the other hand, Ld. DR while relying upon its written submission submitted that the only issue involved in this case is the transfer pricing adjustment made on account of interest amounting to Rs. 7.80 crores. It was submitted that during the years 2010 and 2011, the assessee had advanced amounts aggregating to USD 68,000,000 to its associated enterprise as the assessee had not allotted any shares in respect of the same. Accordingly interest at the rate of 3.53% was held to be receivable in respect of the same. 11.1 The Ld. DR also drawn our attention to the details of share application money submitted to the DRP and the same is reproduced below:-
Dates US$ Rate Amount in Rs.
14/09/2010 3,50,00,000 46.38 162,33,00,000
22/09/2010 50,00,000 45.58 22,79,00,000
04/10/2010 45,00,000 44.63 20,08,35,000
08/11/2010 50,00,000 44.43 22,21,50,000
18/11/2010 85,00,000 45.30 38,50,50,000
07/02/2011 1,00,00,000 45.49
45,49,00,000
Exchange Fluctuation -4,46,15,000
6,80,00,000 306,95,20,000
19
I.T.A. No. 6630 /Mum/2016
M/s Videocon Oil Ventures Ltd.
11.2 The Ld. DR further submitted that in the course of transfer pricing proceedings the TPO asked the assessee to state whether any shares have been allotted against the above mentioned sums remitted to the AE. On the basis of assessee's reply the TPO found that:
i. The entire amount had been refunded by the AE on 05.03.14. No part of the above remittances was converted into share capital. ii. During the previous year the assessee has not earned any income whereas it has incurred finance cost to the extent of Rs. 1.31 crores. iii. The assessee failed to submit the financial statement of the AE for the relevant period even though as the holding company the assessee undoubtedly had access to the same. iv. The assessee also failed to produce any resolution passed by the AE calling for the share application money and justification for non- allotment of shares against the same.
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$, the TPO applied Libor+262.50 BPS. The same came to 3.53%.20
I.T.A. No. 6630 /Mum/2016 M/s Videocon Oil Ventures Ltd.
The TPO determined the Arm's Length interest at Rs.7.80 crores.
11.4 It was submitted by Ld. DR that before the DRP, the assessee furnished two pages of the AE's Balance sheet. It was found that the authorized share capital of the AE as disclosed in its Balance Sheet as on 31/12/2013 was US$ 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.21
I.T.A. No. 6630 /Mum/2016 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. After having heard the counsels for both the parties at length and considering the facts of the present case as well as legal proposition as advanced before us, we are confining our decision by adjudicating the jurisdictional issue raised in ground No.1.9 by the assessee.
12.1 In the instant case there is no dispute to the fact that the assessee vide its letter dated 13.06.2017 has requested Ld. Assessing Officer [AO] to provide the copy of 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 and note 22 I.T.A. No. 6630 /Mum/2016 M/s Videocon Oil Ventures Ltd.
in Form 3CEB.The assessee was provided by the Id. AO vide letter dated 13.06.2017 following documents:
(i) The copy of reference made to TPO dated 17.03.2015
(ii) The copy of letter by the office of CIT dated 16.03.2015 conveying the approval of CIT.
12.2 However, 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 is reproduced below:
"3. 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"
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) 23 I.T.A. No. 6630 /Mum/2016 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.
24
I.T.A. No. 6630 /Mum/2016 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 25 I.T.A. No. 6630 /Mum/2016 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.26
I.T.A. No. 6630 /Mum/2016 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.27
I.T.A. No. 6630 /Mum/2016 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 28 I.T.A. No. 6630 /Mum/2016 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 29 I.T.A. No. 6630 /Mum/2016 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.
33. Normally when an accountant reports an international transaction underSection 92E there may be no dispute that there is an income arising and/or being affected or a potential of an income arising and/or being affected by an international transaction on determination of ALP. However when an assessee challenges the above premise, then the issue must be decided Such an issue must be dealt with at the very threshold that is before determination of ALP. This is so because in case it is held that in the International Transaction there is no income or potential of any income arising and/or being effected on determination of an ALP, the entire exercise of determining the 30 I.T.A. No. 6630 /Mum/2016 M/s Videocon Oil Ventures Ltd.
ALP would become academic. In terms of Section 92CA (4) , the Assessing Q/ficer is bound to pass an order in conformity with the ALP determined by the TPO as held by another Division Bench of this Court in the judgment dated 6 September 2013 in Vodafone ii case. However where the Assessing officer is himself determining the ALP in terms of Section 94C('3) then in accordance with Section 94C(4) he would compute the income, having regard to the ALP. In such cases where the Assessing officer decides the ALP himself; it is open to him to consider the issue qf income arising and/or being affected or not before commencing the proceedings under Chapter X or at the stage ofpassing an assessment order.
34. However, in cases of transaction referred to the TPO, it would be for theAssessing Officer to first determine the issue of any income arising and/or being effected or potentially arising on determination of ALP before referring the transaction to the TPO, when specifically contended by the petitioner/Assessee. This is also indicated in section 92CA(1), which requires an Assessing officer to refer an International transaction for determination to the TPO only if he considers it"necessary or expedient"' to refer the matter to the TPO. The exercise of finding out whether any income arises and/or is affected or potentially arises and1or is affected by the International Transaction would certainly be a factor to determine whether or not it is necessary or expedient to refer the matter to the TPO. In case no objection is raised by the assessee to the applicability of Chapter X then the prima facie view of the Assessing officer would be sufficient 31 I.T.A. No. 6630 /Mum/2016 M/s Videocon Oil Ventures Ltd.
before referring the transaction to the TPO for determining the ALP. However where an objection is raised about the applicability of chapter X by an assessee then the requirement for taking a decision after taking on board the objection becomes necessary. In the absence of it being considered at this stage, the same could only be considered by the DRP and as pointed out above, if 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. It is for the above reason that grant of personal hearing before referring the matter to the 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. Admittedly the aforesaid exercise of considering the objection of no income arising or potentially arising from the transaction has not been done in this case and finds no mention even in the draft assessment order.
......
..............
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 ofAO 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 Section 92CA(4), in all respects including jurisdictional issueheld by this Court in Vodafone II case.
46 In view of the above discussion, We find no merit in the contentions of the revenue that no hearing is required to he given to the assessee in respect of jurisdictional issues. There has to be 32 I.T.A. No. 6630 /Mum/2016 M/s Videocon Oil Ventures Ltd.
consideration of the petitioner's objection to the applicability of Chapter X. The some should at/east have found a place in the impugned draft assessment order. The failure on the part of the AO in not having examined the issue of income arising or not from an international transaction is an illegality.
Thus, the Hon'ble Bombay High Court holds in above discussed Vodafone case is as under:
(i) The satisfaction of the AO that it is "necessary and expedient" to refer the matter to the TPO a jurisdictional matter.
(ii) A hearing ought to be given by the AO before making a reference to the TPO.
(iii) If these jurisdictional requirements are not satisfied, then the entire order is illegal (para 46).
The above mentioned conclusion was also reiterated by Bombay High Court in the case of Vodafone India Service (P.) Ltd. 359 ITR 133.
Thus as per amendment provisions of section 92CA(1), before making a reference to the TPO the exercise of finding out whether any income arises and/or is affected or potentially arises and/or is affected by the International Transaction would certainly be a factor to determined by the AO by giving opportunity of being heard to the assessee. More particularly 33 I.T.A. No. 6630 /Mum/2016 M/s Videocon Oil Ventures Ltd.
where an objection is raised about the applicability of chapter X by an assessee then the requirement for taking a decision after taking on board the objection becomes necessary.
Admittedly the aforesaid exercise of considering the objection of no income arising or potentially arising from the transaction has been done by AO in this case before making reference to the TPO and also finds no mention even in the draft assessment order. This in our view is a jurisdictional issue.
In this connection, the judgement of Sony India Private Ltd. vs. CBD.T & Anothet288 ITR 52, that held that no such hearing was required is instructive. In that case the Delhi High Court was considering the position of law as it stood before 01.06.2007. Section 92CA(4) before its substitution w.e.f 01.06.2007 read as follows:
"(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. "
It held in Para 21 as follows:
34
I.T.A. No. 6630 /Mum/2016 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 35 I.T.A. No. 6630 /Mum/2016 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 36 I.T.A. No. 6630 /Mum/2016 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 37 I.T.A. No. 6630 /Mum/2016 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.
38
I.T.A. No. 6630 /Mum/2016 M/s Videocon Oil Ventures Ltd.
14. In the net result, the assessee's appeal for AY 2010-11 is allowed in terms indicated herein above. Order pronounced in the open court on 20th Sept, 2017.
Sd/- Sd/-
(R. C. Sharma) (Sandeep Gosain)
लेखासदस्य / Accountant Member न्याययकसदस्य / Judicial Member
मुंबई Mumbai;यदनां कDated : 20.09.2017
Sr.PS. Dhananjay
आदे शकीप्रनिनिनिअग्रेनर्ि/Copy of the Order forwarded to :
1. अपीलाथी/ The Appellant
2. प्रत्यथी/ The Respondent
3. आयकरआयुक्त(अपील) / The CIT(A)
4. आयकरआयुक्त/ CIT- concerned
5. यवभागीयप्रयतयनयध, आयकरअपीलीयअयधकरण, मुंबई/ DR, ITAT, Mumbai
6. गार्ड फाईल / Guard File आदे शधिुसधर/ BY ORDER, .उि/सहधयकिंजीकधर (Dy./Asstt.Registrar) आयकरअिीिीयअनर्करण, मुंबई/ ITAT, Mumbai