Gujarat High Court
Axis Bank Limited vs The Assistant Commissioner Of Income ... on 18 March, 2025
Author: Bhargav D. Karia
Bench: Bhargav D. Karia
NEUTRAL CITATION
C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025
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Reserved On : 02/12/2024
Pronounced On : 18/03/2025
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/SPECIAL CIVIL APPLICATION NO. 1717 of 2021
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR. JUSTICE BHARGAV D. KARIA
and
HONOURABLE MR.JUSTICE D.N.RAY
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Approved for Reporting Yes No
✓
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AXIS BANK LIMITED
Versus
THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 1(1)(1),
AHMEDABAD & ANR.
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Appearance:
MR S N SOPARKAR, SENIOR ADVOCATE WITH MR B S
SOPARKAR(6851) for the Petitioner(s) No. 1
MR.VARUN K.PATEL(3802) for the Respondent(s) No. 1,2
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CORAM:HONOURABLE MR. JUSTICE BHARGAV D. KARIA
and
HONOURABLE MR.JUSTICE D.N.RAY
CAV JUDGMENT
(PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA)
1. Heard learned Senior Advocate Mr. S.N. Soparkar with learned advocate Mr. B.S. Page 1 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined Soparkar for the petitioner and learned advocate Mr. Varun K. Patel for the respondent.
2. By this petition under Article 226 of the Constitution of India, the petitioner has challenged the reference made by respondent no.1- the Assistant Commissioner of Income Tax, Circle 1(1) (1), Ahmedabad to respondent no.2 the Joint Commissioner of Income Tax/Additional/Joint DIT(TPO), Ahmedabad under under section 92CA(1) of the Income Tax Act, 1961 (For short "the Act") for Assessment Year 2017-2018. The petitioner has also challenged the notice under section 92CA(2) issued by respondent no.2 dated 30.12.2019 and approval dated 24.12.2019.
Page 2 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined :Facts of the case:
3. Brief facts of the case are that petitioner is a bank engaged in Financial Service Sector. For Assessment Year 2017-
2018, the petitioner filed original return of income on 24.11.2017 at Rs. 14,068.11 crores. The petitioner filed Accountant Report in From 3CEB dated 15.11.2017 on 22.11.2017. The petitioner thereafter filed revised return of income on 28.03.2019 at Rs.14,163.69 crores.
4. Case of the petitioner was selected for scrutiny on non transfer pricing risk parameters and notice under section 143(2) of the Act was issued on 27.09.2018 for which the assessment is going on.
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5. On 13.12.2019, respondent no.1 issued a show cause notice to the petitioner as to why the case of the petitioner should not be referred to the Transfer Pricing Officer.
6. The petitioner replied to said notice vide letter dated 23.12.2019 justifying as to why the case should not be referred.
7. It is the case of the petitioner that satisfaction recorded by respondent no.1 was not provided to the petitioner to the effect 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 or specified domestic transaction.
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8. It is the case of the petitioner that disregarding the objections raised by the petitioner and without passing a speaking order disposing off the same, respondent no.1 made reference to respondent no.2 under section 92CA(3) of the Act.
9. The petitioner thereafter received notice dated 30.12.2019 from respondent no.2. The petitioner raised objections to such notice vide letter dated 27.1.2020.
It is the case of the petitioner that the petitioner had not received any order disposing off the objections.
10. It is the case of the petitioner that respondent no.2 without dealing with the objections raised by the petitioner has issued further show cause notice dated Page 5 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined 24.01.2021.
11. Being aggrieved by the action of the respondents, the petitioner has preferred the present petition.
:Relevant provisions:
12. Section 92CA reads as under:
"92CA. [ Reference to Transfer Pricing Officer (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.Page 6 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025
NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined (2) Where a reference is made under sub-section (1), the Transfer Pricing Officer shall serve a notice on the assessee requiring him to produce or cause to be produced on a date to be specified therein, any evidence on which the assessee may rely in support of the computation made by him of the arm's length price in relation to the international transaction or specified domestic transaction referred to in sub-section (1).
(2A) Where any other international transaction other than an international transaction referred under sub-section (1), comes to the notice of the Transfer Pricing Officer during the course of the proceedings before him, the provisions of this Chapter shall apply as if such other international transaction is an international transaction referred to him under sub-section (1).
(2B)Where in respect of an international transaction, the assessee has not furnished the report under section 92E and such transaction comes to the notice of the Transfer Pricing Officer during the course of the proceeding before him, the provisions of this Chapter shall apply as if such transaction is an international transaction referred to him under sub-section (1).
Page 7 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined (2C) Nothing contained in sub-section (2B) shall empower the Assessing Officer either to assess or reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year, proceedings for which have been completed before the 1st day of July, 2012...."
: Submissions of the petitioner :
13. Learned Senior Advocate Mr. S.N. Soparkar for the petitioner submitted that as per section 92CA(1), the Assessing Officer has to refer the computation of Arm's Length Price (ALP) to Transfer Pricing Officer (TPO) when he considers that it is necessary or expedient so to do. Reference was made to the Instruction No.3 of 2016 issued by the Central Board of Direct Taxes (CBDT) wherein CBDT has decided that Assessing Officer shall make a reference to the TPO only under the Page 8 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined circumstances laid out in the said instructions as enumerated in para no. 3.3 and 3.4 as under :
"3.3 Cases selected for scrutiny on non-transfer pricing risk parameters but also having the international transactions or specified domestic transactions, shall be referred to TPOs only in following circumstances:
(a) where the AO comes to know that the taxpayer has entered into international transactions or specified domestic transactions or both but the taxpayer has either not filed the Accountant's report under section 92E at all or has not disclosed the said transactions in the Accountant's report filed;
(b) where there has been a transfer pricing adjustment of Rs.
10 Crore or more in an earlier assessment year and such adjustment has been upheld by the judicial authorities or is pending in appeal; and
(c) where search and seizure or survey operations have been carried out under the provisions Page 9 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined of the Income-tax Act and findings regarding transfer pricing issues in respect of international transactions or specified domestic transactions or both have been recorded by the Investigation Wing or the AO.
3.4 For cases to be referred by the AO to the TPO in accordance with paragraphs 3.2 and 3.3 above, in respect of transactions having 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 or specified domestic transaction before seeking approval of the PCIT or CIT to refer the matter to the TPO for determination of the ALP:
where the taxpayer has not filed the Accountant's report under section 92E of the Act but the international transactions or specified domestic transactions undertaken by it come to the notice of the AO;
where the taxpayer has not declared one or more international transaction or specified domestic transaction in the Accountant's Page 10 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined report filed under section 92E of the Act and the said transaction or transactions come to the notice of the AO; and where the taxpayer has declared the international transactions or specified domestic transactions in the Accountant's report filed under section 92E of the Act but has made certain qualifying remarks to the effect that the said transactions are not international transactions or specified domestic transactions or they do not impact the income of the taxpayer.
In the above three situations, the AO must provide an opportunity of being heard to the taxpayer before recording his satisfaction or otherwise. In case no objection is raised by the taxpayer to the applicability of Chapter X [Sections 92 to 92F] of the Act to these three situations, then AO should refer the international transaction or specified domestic transaction to the TPO for determining the ALP after obtaining the approval of the PCIT or CIT. However, where the applicability of Chapter X [Sections 92 to 92F] to these three situations is objected to by the taxpayer, the AO must consider the taxpayer's objections and pass Page 11 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined a speaking order so as to comply with the principles of natural justice. If the AO decides in the said order that the transaction in question needs to be referred to the TPO, he should make a reference after obtaining the approval of the PCIT or CIT."
14. Referring to above, it was submitted that respondent no.1 has violated Instruction No. 3 of 2016 by making a reference contrary to para no. 3.3(a) though the Accountant's report is filed by the petitioner and transactions based on which the reference is made to TPO are not international transactions at all.
15. It was further submitted that respondent no.1 has failed to record its satisfaction to the effect that there is an income or a potential of an income arising and/or being affected on Page 12 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined determination of the ALP of an international transaction or specified domestic transaction.
16. It was submitted that speaking order disposing off the objections passed by respondent no.1 was never served upon the petitioner and the same is made available along with the affidavit in reply filed in this petition at Annexure-R2 (page 179 to 184 of the petition).
17. It was therefore, submitted that there are no circumstances prescribed in Instruction No.3 of 2016 in which the case of the petitioner may be referred to the Transfer Pricing Officer.
18. Reference was made to the reasons Page 13 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined recorded by the respondent no.1 for transferring the case to the TPO under section 92CA of the Act. It was submitted that as per para no.3, it is recorded that petitioner was given an opportunity by letter dated 13.12.2019 to show cause as to why the case should not be referred to TPO and adjournment was sought till 25.12.2019 and reply was filed on 23.12.2019 by the petitioner stating that transaction is not covered under the provisions of section 92E of the Act and the same are not international transactions. It was submitted that further opportunity was provided by notice dated 23.12.2019 fixing the hearing on 24.12.2019.
19. Learned Senior Advocate Mr. Soparkar Page 14 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined referred to Annexure-R1 at page 176 to 178 filed along with affidavit in reply to point out that said notice under section 142(1) of the Act was issued at 10:03 PM on 23.12.2019 requiring the petitioner to furnish compliance at 12:15 PM on 24.12.2019 thereby giving less than 24 hours to file the compliance. It was therefore, submitted that the respondent has recorded the reasons by stating that no one attended and no reply was received.
It was submitted that as per the reasons therefore, recorded on 24.12.2019 as it appears on page-184 of the paper book, no opportunity was provided to the petitioner and notice dated 23.12.2019 was nothing but an eyewash. On the same day, the approval was granted by the Principal Commissioner of Income Tax, Ahmedabad to Page 15 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined transfer the case to TPO only because for earlier assessment year 2016-2017, the case was transferred to TPO.
20. Learned Senior Advocate Mr. Soparkar therefore, referred to the order passed by TPO for Assessment Year 2016-2017 to point out that TPO has not made any adjustment so far as transaction between the branch office of the petitioner bank outside India with head office of the petitioner in India but has only made adjustment on account of interest on loan only. It was therefore, submitted that the respondent could not have made reference to TPO considering the identical facts to transfer case for Assessment Year 2017- 2018 relying upon the order of transfer made for Assessment Year 2016-2017.
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21. It was further submitted that there are no two AEs as per section 92B(1) of the Act as branches of the petitioner bank outside India cannot be considered as a separate AE as no income element would be involved in case of transaction between head office of the petitioner in India with the branch of the petitioner outside India as entire income would be clubbed in the hands of the petitioner bank in India which would be offered to tax. It was therefore, submitted that in absence of income escaping assessment, respondent no.1 could not have passed the order to transfer the case to the TPO as no income would escape as the Head Office and the branch are the same entity and the petitioner being resident in India, his Page 17 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined global income is taxable in India.
22. In support of his submission reliance was placed on the decision in case of Mumbai Tribunal for persuasive value in case of Elder Exim (P.) Ltd. v. Deputy Commissioner of Income tax, Cen Cir.-12, Mumbai reported in (2017) 85 taxmann.com 338 (Mumbai-Trib), wherein in case of Durian, it was observed by the Tribunal that section 92B(1) of the Act refers to an "international transaction" to be a transaction between two or more associated enterprises, "either or both of whom are non-residents". It was therefore, submitted that when the petitioner bank is resident in India, the transaction with its branches outside India cannot be covered by provisions of Chapter X of the Act.
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23. It was therefore, submitted that even condition precedent provided as per para no. 3.4 of the Instruction No. 3 of 2016 is also not complied with as there is no element of profit involved in transaction between the petitioner's head office and its branches outside India.
24. It was further submitted that there is clear breach of principle of natural justice as notice dated 23.12.2019 was sent through email in late night of that day requiring the petitioner to remain present on the next date i.e. 24.12.2019 at 12:15 PM and as the petitioner obviously could not remain present at such a short notice and therefore, the petitioner was not provided with adequate Page 19 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined opportunity of hearing.
25. Learned Senior Advocate Mr. Soparkar also referred to the decision of Delhi Tribunal in case of Aithent Technologies (P.) Ltd. v. Deputy Commissioner of Income Tax, Circle-1(1) reported in (2016) 74 taxmann.com 214 (Delhi-Trib) for persuasive value to explain the meaning of international transaction with branch office as the petitioner had offered for taxation not only the income earned by Indian office but also whole of the income earned by its branches outside India and therefore, Transfer Pricing provision would not be applicable.
26. Learned Senior Advocate Mr. Soparkar in the alternative submitted that letter Page 20 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined of approval issued by the Principal Commissioner of Income Tax dated 24.12.2019 produced at Annexure-R3 is without DIN number and therefore, it is null and void document as per Circular No. 19/2019 dated 14.08.2019.
27. Reliance was placed on the decision of Delhi High Court in case of Commissioner of Income-tax (International Arbitration) v. Brandix Mauritius Holdings Ltd. reported in (2023) 456 ITR 34 (Delhi) and decision of Bombay High Court in case of Ashok Commercial Enterprises v.
Assistant Commissioner of Income Tax reported in (2023) 459 ITR 100 (BOM).
28. Reliance was also placed on decision of this Court in case of Hitachi Hi Rel Power Electronics Pvt. Ltd. v. The Deputy Page 21 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined Commissioner of Income Tax Circle 2(1)(1), Ahmedabad rendered on 19.08.2021 in Special Civil Application No.23302 of 2019 wherein in similar facts, this Court quashed and set aside the notice as well as order of transfer to TPO remitting the matter to the Assessing Officer for fresh consideration of the matter and issues discussed in the said order after giving opportunity of hearing to the petitioner.
It was further submitted that the case of the petitioner does not fall within the parameters and circumstances stated in paragraph nos. 3.2, 3.3(b) and 3.3(c) of the Instruction No.3 of 2016 and no satisfaction is recorded as per para no.
3.4 thereof and hence the contention of the Assessing Officer that certain transactions have not been disclosed in Page 22 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined Form 3CEB for Assessment Year 2016-2017 which are also not disclosed for the year under consideration is also incorrect as such transaction do not have effect of taxable income which is fortified by the findings arrived at by the TPO for 2016- 2017. It was also pointed out that for Assessment Years 2018-2019 and 2019-2020 TPO has recognised such transactions which ought to have been reported but apart from that no upward adjustment has been made and therefore, in absence of any income impact, the impugned order is liable to be quashed and set aside.
: Submissions of the respondent :
29. Per contra, learned Senior Standing Counsel Mr. Varun K. Patel for the respondent submitted that the petition is filed at a pre-mature stage as only Page 23 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined reference is made under section 92CA(1) of the Act to TPO for determining Arm's Length Price in relation to international transactions and TPO after providing full opportunity to the petitioner shall pass an order under sub-section (3) of section 92CA of the Act determining the Arm's Length Price in relation to international transaction or specified domestic transaction and thereafter, the Assessing Officer shall proceed to compute total income of the assessee in conformity with the ALP determined by TPO. It was therefore, submitted that the petitioner would be afforded adequate opportunity of hearing before TPO to demonstrate that international transaction has been entered into at ALP. It was further submitted that all principles of natural justice have Page 24 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined been complied with and no element of prejudice would be caused to the petitioner as objections raised by the petitioner have been disposed off by the speaking order.
30. It was submitted that the petitioner has deliberately suppressed the factum of objections dated 23.12.2019 being disposed off by respondent no.1 by speaking order to the effect that the petitioner failed to disclose international transactions which were liable to be disclosed in Form 3CEB report under section 92E of the Act.
31. It was submitted that respondent no.1 has referred to the order passed by TPO for Assessment Year 2016-2017 under section 92CA(3) of the Act for the purpose Page 25 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined of rebutting all the points raised by the petitioner in its objection dated 23.12.2019 only. It was therefore, pointed out that the petitioner has obtained stay by misleading this Court by suppressing the factum of objections having been considered and disposed off by the respondent no.1. It was therefore, submitted that only on this count, the petition is liable to be dismissed.
32. Learned Senior Standing Counsel Mr. Patel referred to chronology of events enumerated in para no. 5 of the affidavit in reply to submit that adequate opportunity has been granted to the petitioner and thereafter proposal dated 24.12.2019 was made by respondent no.1 to Principal Commissioner of Income Tax for Page 26 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined approval after recording the satisfaction to the effect that there is an income or a potential of an income arising and/or being affected on determination of ALP of international transaction or specified domestic transaction of the petitioner.
33. It was submitted that the Principal Commissioner of Income Tax-1 had accorded the approval by letter dated 24.12.2019 in accordance with the CBDT Circular No. 3 of 2016 for the purpose of reference of the case to the TPO and thereafter, respondent no.1 made reference to TPO by letter dated 26.12.2019. In support of his submissions, learned Senior Standing Counsel Mr. Patel referred to and relied upon the following averments made in the affidavit in reply filed on behalf of the respondent:Page 27 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025
NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined "8. Without prejudice to the above, the para wise comments to the contentions raised in the petition is as under:
(i) ...
I submit that show cause notice was issued on 13.12.2019 wherein Petitioner was asked details of international transactions with associated enterprises / overseas branches and was asked as to why the matter should not be referred to TPO regarding non-disclosure of such transactions. In response to the said notice, the Petitioner filed adjournment on 18.12.2019. Thereafter, the Petitioner filed reply on 23.12.2019. In the said reply, it can be seen from para 1.2 that the Petitioner is well aware of the fact that the issue emanates from TPO order for AY 2016-17. The Petitioner contended that the transactions with overseas branches / associated enterprises are not international transactions and that there is no escapement or potential escapement of income. However, the said matter was deliberated in length by the TPO in the order passed for AY 2016-17. Since the Respondent No.1 -Assessing Officer is bound by the TPO order and facts for A.Y 2017-18 being identical, there is Page 28 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined no reason for the Respondent No.1
- Assessing Officer to hold a different view other than the one held by TPO. The said reply/ objection dated 23.12.2019 was dealt with by the assessing officer as can be seen from the notice cum order disposing of objections dated 23.12.2019 which the Petitioner consciously chose not to produce before this Hon'ble Court. In the said notice cum order disposing of objections dated 23.12.2019, the assessing officer has categorically referred to the exhaustive and detailed findings given by the TPO in the order passed u/s 92CA(3) for A.Y 2016-17 which clearly go to show that the Petitioner failed to disclose international transactions which were liable to be disclosed in the Accountant's report under Section 92E of the Act. The assessing officer further observed that the facts of A.Y 2016-17 and 2017-18 are identical and there is failure on part of the Petitioner to disclose such international transaction which makes the case fit for referring it to the TPO. The said notice cum order disposing objections dated 23.12.2019 was issued through ITBA and duly served upon the Petitioner coupled with the fact that the same was also e-mailed to Shri Prosenjit Choudhuri (F&A)] Page 29 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined [Head Tax (prosenjit.choudhuri @axisbank.com) and copy to Rakesh Gupta Shri (rakeshgupta346 @gmail.com) and Shri Lokhandwala (operation head(lokhandwala. operation [email protected]). Therefore, the contention that reference is made without passing a speaking order disposing off the objections does not hold merit and is contrary to the records.
I reiterate that satisfaction is recorded on 24.12.2019 to the effect 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 or specified domestic transaction. I submit that satisfaction was recorded and detailed report was sent to Pr. CIT-1, Ahmedabad which was also endorsed by the Addl. CIT Range 1(1) Ahmedabad. The office of the Principal Commissioner of Income Tax-1 accorded approval under letter dated 24.12.2019 in accordance with CBDT Instruction no. 3 of 2016 dated 10.3.2016 for the purpose of reference of the case to the TPO.
(ii) ...
(iii) With reference to para
3.3(a), I submit that the
petitioner failed to report
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NEUTRAL CITATION
C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025
undefined
details of international
transaction with overseas branches located at Sri Lanka, Dubai and Singapore in the accountant report filed under Section 92E of the Act. The contention that such transactions are not international transactions is baseless and denied.
(iv) With reference to para 3.3(b), I reiterate that satisfaction is recorded on 24.12.2019 to the effect 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 or specified domestic transaction. Therefore, the contention of Petitioner of satisfaction having not been recorded does not hold any merit.
(v) With reference to para 3.3(c) and (d), I reiterate that the notice cum order disposing of objections dated 23.12.2019 was served upon the Petitioner which the Petitioner deliberately chose not to produce before this Hon'ble Court. In the said notice cum order disposing of objections dated 23.12.2019, the assessing officer has categorically referred to the exhaustive and detailed findings given by the TPO in the order passed us 92CA(3) for A.Y Page 31 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined 2016-17 which clearly go to show that the Petitioner failed to disclose international transactions which were liable to be disclosed in the Accountant's report under Section 92E of the Act. The reliance placed by the Petitioner on various judgments is entirely misplaced and the said judgments have no applicability over the facts of the present case."
34. Referring to the above averments, it was further submitted that the contention raised on behalf of the petitioner that transaction with overseas branches are not transactions with two or more associated enterprises is also baseless and incorrect in view of the order passed by the TPO for Assessment Year 2016-2017 wherein similar contention was raised and negated by a detailed order. It was submitted that the contentions which are raised by the petitioner were already raised during the Page 32 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined proceedings for Assessment Year 2016-2017 and thereafter reference was made to TPO and reliance was placed on the observations made by TPO in order passed under section 92CA(3) of the Act for Assessment Year 2016-2017 wherein it is observed that the transactions between the petitioner's head office and its branches are international transactions and the same were required to be reported under section 92E of the Act and were required to be bench-marked as per the provisions of the Act.
35. It was therefore, submitted that as per the reasons recorded by respondent no.1 and satisfaction arrived at by respondent no.1 as per para no. 3.3 of the CBDT Instruction No. 3 of 2016, no Page 33 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined interference may be made in the impugned notice and order to refer the matter to TPO for Assessment Year 2017-2018.
36. With regard to the contention raised on behalf of the petitioner in the affidavit in rejoinder with regard to absence of DIN number in approval granted by the Principal Commissioner of Income Tax, it was submitted that it was an internal communication granting approval which does not require any DIN number.
: Discussion and Findings :
37. Having heard the learned advocates for the respective parties and considering the facts of the case, the petitioner has not disputed that the transactions which were entered into by the petitioner with his branch office for AY 2017-2018 were Page 34 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined different than the transactions which were entered for AY 2016-2017.
38. The contentions are raised by the petitioner in this petition to challenge the notice to transfer case to TPO under section 92CA of the Act and transfer of case to the TPO by letter dated 26.12.2019 as per the approval granted by the Principal Commissioner of Income Tax-1.
39. The contentions raised by the petitioner are considered by TPO in order dated 01.11.2019 for Assessment Year 2016- 2017 passed under section 92CA(3) of the Act dealing with each of the contention of the petitioner for previous Assessment Year as under:
Page 35 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined "6.1 The contentions raised by the assessee are being dealt with as under :-
1. The argument of the assessee that the transfer pricing regulation applies if there is a transaction between a resident and a non-resident who are associated enterprises. It has clearly been demonstrated in the show cause notice that the law has created a deeming fiction in the definition of the word 'enterprise' which is defined in sec.92F of the Act. By this deeming fiction although a Permanent Establishment (P.E) is the part of the same enterprise, however, for the purpose of transfer pricing regulation, the same is deemed to be an associated enterprise. Therefore, if there is a transaction between the head office and its branch office situated in Sri Lanka, what is required to be analysed is whether there is a transaction between two associated enterprises. Due to the fiction created by law as has been highlighted in the earlier part of this order, the P.E of the assessee has been treated as an associated enterprise as a separate person. Therefore, in this type of transaction, there are two entities involved. The status of the head office of course would be resident in India, Page 36 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined however, the P.E/Branch office situated in Sri Lanka would be considered as a non resident entity for taxing the income of such entity in India. The income of the branch would not be taxable in India as per the provisions of sec. 5 of the Act on the premise that the branch is a resident of Sri Lanka and therefore, liable to pay tax in Sri Lanka only.
Therefore, the branch of the assessee in Sri Lanka would qualify as a non resident as far as the provisions of Income-tax are concerned and being taxed in India accordingly. The issue of allowing credit of payment of taxes made in Sri Lanka is a different issue which is governed by the provisions of sec. 90/91 of the Act, which has nothing to do with the charging provisions of the Act. It is a settled position of law that for any income to be chargeable to tax in India, it is necessary that the same is covered by the charging section. In the absence of any charge, the same cannot become taxable in India.
1.1 There might be an argument that the assessee has to pay the differential rate of tax in India if the tax rate in Sri Lanka (in the given example) is less than the tax rate in India as the income of the branch is Page 37 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined consolidated in the accounts of the Head Office. However, this does not capture the complete picture of the transaction as there can be a scenario in which if the tax rate is higher in Sri Lanka, the Indian Government does not get a single penny of tax. If the P.E. of the assessee is considered to be a resident in India, then it is liable to pay tax in India.
1.2 A bare reading of the Act makes it clear that the Permanent Establishment (PE) of an enterprise has been deemed to be an Associated Enterprise (AE) of that enterprise. Therefore, there is a deeming fiction created by the law which makes a PE of an enterprise as a separate legal person (AE) by introducing such deeming fiction. A deeming fiction is introduced by the law to make it as such which otherwise will not form an AE on its own. This is so because the PE of an enterprise is considered as part of the enterprise itself and, therefore, in the normal circumstances, the same would not be treated as a separate enterprise. In view of the above, an exception has been carved out by way of a deeming fiction of law in the definition of the term enterprise by which the PE of the enterprise would be Page 38 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined considered as an AE of such enterprise for the purpose of transfer pricing provisions of the Act. This is also borne out by the fact that the PE situated in the other country would be taxable as per the provisions of Domestic Taxation law of that country for the income which has been earned by the PE in that country.
Although the profits of the PE would be taken into account while computing the world wide income of the resident company, however, the credit for taxes paid in the other country would be provided in India and if the tax rate in India is higher, the residual tax (the difference between the tax paid in that country with the tax to be paid in India on doubly taxed income) is only required to be paid in India. If the tax rate in the other country is higher than the tax rate in India, the assessee is not required to pay any tax in India. For eg., if in case of a loan transaction between the HO and the PE situated outside India, say for eg. in Sri Lanka, the interest charged on such loan is at 5% whereas ALP of the interest should be 6%, the income of the PE based in Sri Lanka increases by 1% whereas if the same transaction is decided at ALP, the income of the PE in Sri Lanka gets reduced by 1% whereas Page 39 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined the income of the HO in India consequently increases by 1%. If no transfer pricing exercise is undertaken in this transaction, the income of the PE is inflated by 1% on which the Sri Lanka Government is entitled to charge the tax whereas this tax is due legitimately to the Indian Government as the income of the Head Office due to this transaction is reduced by 1%. The Indian Government would lose the tax on this 1% income either by giving credit for taxes paid in Sri Lanka or only charging the differential tax rate. The net result of this transaction is that the tax base of Indian Government/ Income Tax Department would have been eroded to this extent. Thus, base erosion is one of the most important considerations/objective of introducing the transfer pricing provisions in India.
1.3 In the aforesaid background, if the provisions of the Act reproduced in para no.2.6, as referred to hereinabove, are read in conjuction, it follows that the transaction of any assessee with its permanent establishment, that qualifies as an associated enterprise, situated outside the country takes the form of an International Transaction, as defined u/s.92B of the Act, and is Page 40 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined therefore, covered by the provisions of Chapter X that deals with special provisions relating to avoidance of tax. Admittedly, any such international transaction has to be bench marked by the assessee and a report from an accountant in the prescribed form duly signed and verified in the prescribed manner by such accountant and setting forth such particulars as may be prescribed, as mandated u/s.92E of the Act, should be obtained and furnished before the specified date. The form i.e. referred to herein above is Form 3CEB and as such the assessee was required to include the international transactions entered into with its permanent establishments in such form for the purpose of reporting as mandated by the Act. However, on perusal of the form 3СЕВ filed by the assessee it was noticed that the assessee did not report any transaction with its AEs apart from the transactions entered into with Axis Bank UK Ltd.
1.4 A perusal of Double Taxation Avoidance Agreement (DTAA) entered into by India with various countries also states that in case of a banking company, the interest expenses to be paid to the Head Office would be allowed to be deducted while computing the Page 41 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined income of the PE situated in that country. This is so even though it is clearly provided that all the other expenses which are to be paid to the Head Office by way of royalties, fees or similar payments are not to be allowed while computing the income of the PE on the principle of transacting with self. Therefore, even in the DTAAs, an exception has been carved out by way of which the interest payment to the HO by the PE engaged in the banking business is allowed to be claimed as a deduction while computing its income. The provisions of clause 7(3) is being reproduced as under
[clause 7(3) of the Indo-Sri Lanka DTAA is being reproduced as the assessee company has a PE in Sri Lanka]:
"In the determination of the profits of a permanent establishment, there shall be allowed as deduction expenses which are incurred for the purposes of the business of the permanent establishment including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere. However, no such deduction shall be allowed in respect of amounts, if any, paid (otherwise than towards Page 42 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments, in return for the use of patents or other rights, or by way of commission, for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on money lent to the permanent establishment. Likewise, no account shall be taken in the determination of the profits of a permanent establishment, for amounts charged (otherwise than towards reimbursement of actual expenses), by the permanent establishment to the head office of the enterprise or any of its other offices by way of royalties, fees or other similar payments in return for the use of patents or other sights, or by way of commission for specific services performed or for management, or except in the case of a banking enterprise by way of interest on money lent to the head office of the enterprise or any of its other offices." (emphasis supplied)"
A perusal of the above, clearly demonstrates that the P.E in the form of branch office of the assessee company outside India Page 43 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined would be an A.E of the assessee which is to be treated as a non resident for the purpose of application of transfer pricing provisions. There is definitely income accruing or arising to the assessee company in these transactions as these are normal banking company transactions. Even the DAA's signed by India creates a deemed allowance of interest payment to the H.O as a deductible expenditure as per Article 7(3) of the DAA's which also demonstrates clearly that in the case of a banking company, the P.E would be treated as an A.E of the assessee and all the transactions are required to be not only disclosed but also benchmarked in the transfer pricing study.
Therefore, in view of the above discussion, the arguments of the assessee that none of the entities is a non-resident and the status of both the entities is a resident in India and it does not constitute an international transaction in view of both the entities being resident are rejected 6.2 The reliance of the assessee on the judgment of Hon'ble ITAT in the case of Aithent Technologies is also not applicable to the facts of the case. In that case Page 44 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined there were transactions of purchase and sale between the head office and the branch office. It was held by the Hon'ble ITAT that such income of the H.O would be set off with the equal amount of expense of the B.O leaving thereby no separately identifiable income on account of this transaction. The assessee has also given an example to explain this point.
However, the same is not applicable to the facts of this case in view of the following reasons :
(1) The under invoicing/over invoicing would be revenue neutral as there would not be any effect of such transaction in the books of the H.O, is not based on the facts of the case as there would be tax payable on the income of the B.O in the respective country.
As per the example given, if there is under invoicing of the goods, the B.O is liable to pay tax on the difference on which it has earned extra profit in that jurisdiction for which the credit of the taxes paid would have to be given by India. The tax base of India would be eroded to that extent. As per the example given by the assessee, Suppose the Indian head office purchases goods worth Rs. 95 and transfers the same to foreign branch office at Page 45 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined Rs. WO, which are in turn sold by the branch office for a sum of Rs.
120. The profit of the head office will be Rs. 5 (Rs. 100 minus Rs.
95) and the profit of the branch office will be Rs. 20 (Rs. 120 minus Rs. WO). The Indian general enterprise will be chargeable to tax in India on its world income of Rs. 25 (Rs. 5 plus Rs. 20). If for a moment it is presumed that the ALP of the goods transferred to the branch office is Rs. 110 and not Rs. WO and the figure is accordingly altered, the profit of the head office will become Rs. 15 (Rs. 110 minus Rs. 95) and that of the branch office at Rs. 10 (Rs. 120 minus Rs. 110). Again, the Indian general enterprise will be chargeable to tax in India on its world income of Rs. 25 (Rs. 15 plus Rs. 10). There can never be any reason for an Indian enterprise to over or under invoice the goods or services to its foreign branch office because by virtue of section 5(1). it is its world income which is going to be charged to tax in India, Which in all circumstances will remain same at Rs. 25 in the above example. This example is not factually correct as the tax rate applicable in the country in which the B.O is situated would make the difference. This is being highlighted by the assessee own Page 46 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined example as under :
Situation 1 : Over invoicing - If the H.O charges Rs.110/- instead of Rs.100/-, in that case, the profits of the B.O would be reduced by Rs. 10/- and profits of H.O. would increase by Rs.10/-. The increase in the profit of H.O by Rs. 10/- would be entirely taxable in India. However, due to over invoicing, the profit of the B.O are understated in that country and the Indian Tax Department would be directly benefitted in terms of higher taxes in India.
Situation 2 : Under invoicing - If the H.O charges Rs.95/- instead of Rs. 100/-, in that case, the profits of the B.O would be increased by Rs.5/- and profits of H.O would decrease by Rs.5/-. The increase in the profit of B.O by Rs.5/- would be taxable in the country in which the B.O is situated. Therefore, due to under invoicing, the profit of the B.O are overstated in that country resulting in higher taxes on this amount in that country. The Indian Tax Department will not be able to collect taxes on this amount as it is taxable in the hands of the B.O. as the assessee would ask for credit of taxes paid in the other country even though this income Page 47 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined would be included in the accounts of the head office and the same is required to be allowed in view of the express provisions of the Act. Therefore, the Indian Tax Department would directly loose the revenue to the extent of the taxes being paid on this extra income of the B.O in that country. This has also been highlighted by taking a suitable example of the assessee's Sri Lanka Branch in the earlier part of this order. Therefore, there is a clear base erosion and shifting of tax base from India to outside India. The transfer pricing regulations are squarely applicable to these situations.
6.3 It has further been argued by the assessee that to the best of their knowledge and information, none of the Indian banks are reporting such type of transactions to the tax authorities. This argument of the assessee is childish. If as per the provisions of the statute in force, a certain action is required to be taken by the assessee, it is not allowed to take the argument that since the other person is not following the law, the assessee also gets license not to follow the law.
This argument of the assessee cannot be accepted at all.
Page 48 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined Regarding the argument that there being a reasonable bona fide interpretation, the assessee has not even bothered to give a note explaining its bonafide belief. There is no disclosure whatsoever by the assessee at all. Therefore, this argument of the assessee is also rejected 6.4 The other argument of the assessee that there was no intent or motive of tax avoidance, the same cannot be accepted as the intention or the motive is the secondary aspect of the transaction. The first and foremost is whether the assessee was statutorily obliged to report such transactions in the form 3CEB or not. The penalty for which the show cause notice has been issued is regarding non disclosure of the information which the assessee has admittedly not disclosed to the tax authorities. Therefore, whether the he die die er assessee had any motive or intention would not make a difference to the facts of the case.
6.5 The assessee relied on a number of judicial pronouncements, however, they are not applicable to the facts of this case. In the case of M/s. Aithent Technologies of Hon'ble Delhi ITAT, it was relating to the purchase and sale Page 49 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined transactions between the H.O and the B.O which is not the case here. The assessee is a banking company which has mainly interest bearing loan transactions. The same is the case with the judgment of Hon'ble ITAT Mumbai in the case of Elder Exim Pvt. Ltd. 85 Taxmann.com 338. The assessee is a banking company and had entered into transactions of interest bearing loans with its branches during the year.
6.6 The assessee's reliance on the case of Mehta Brothers Exports 33 Taxman.com 504 of Hon'ble ITAT Mumbai judgment regarding non-levy of penalty on the basis of possible alternative view is also not applicable to the facts of the case as the given judgment was having regard to the interplay of section 92A(1) and (2) of the Act which is not the case as per the facts. In this case, the issue is whether the assessee should have reported transactions with its overseas A.Es which have a clear bearing on the profits/assets of the H.O as well as the P.E. 6.7 In view of the above, the arguments advanced by the assessee are not acceptable and accordingly rejected.
6.8 In view of the detailed Page 50 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined discussion above, the A.O is requested to consider and initiate penalty under the provisions of sec.271AA of the Act amounting to Rs.61,05,41,401/- @2% of the value of the international transaction entered into by the assessee with overseas Branch Offices amounting to Rs.30527070061/- which have not been disclosed in form 3CEB and the assessee has also failed to benchmark this transaction as per the provisions of the Act.
xxx 7.2 The assessee's arguments are being dealt with as under:
1. The assessee has explained the modus operandi as to how the transactions are being entered into. All these transactions are relating to foreign currency exchange transactions. Obviously these transactions are required to be entered into at the prevailing market price. Admittedly, the assessee has not disclosed these transactions in form 3CEB. It is also not in dispute that these transactions are international transactions and have been entered into between two associated enterprises. Therefore, it was required to be disclosed by the assessee in form 3СEВ.
2. The assessee has taken the Page 51 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined argument that mere exchange of foreign currency does not result into gain or loss and in absence of any income the transfer pricing proceedings are not applicable.
The assessee is a dealer in a foreign exchange dealer in foreign exchange keeps on entering into transactions for buy and sell foreign currency. Obviously, the transactions by the dealer are being done to earn profit/income. The assessee is entering into foreign currency transaction with it's A.E. Even if the transactions are entered into at the market price, there is bound to be either the profit or the loss until and unless the assessee is entering into fictitious transactions. It is a fact that the foreign currency rate is the most fluctuating market in the world. The variation in the exchange rate of various currencies go up and down many times even in a single day. It is a function of the demand and supply and the related strength of the economy of a country including its monetary and fiscal policy as well as the trade policy which determine the market price of the foreign currency. It is a fact that there is maximum variation in the foreign exchange rates. There may not be a profit or loss on the day of the transaction, however, there would Page 52 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined definitely be either a profit or a loss depending on the position being taken/foreign currency being traded. Therefore, the arguments of the assessee that mere exchange of foreign currency does not result in any income, is not only farfetched but completely based on the imagination of the assessee without any substance whatsoever. Therefore, the arguments of the assessee that there is no income arising from these transactions has not based on the facts of the case and accordingly rejected.
3. The assessee has relied on a number of judgments in support of its contention, however, all these judgments are relating to the capital account transactions in which admittedly no income arises as per the provisions of the charging section. Therefore, all those judgments are not at all applicable to the facts of the case of the assessee. The reliance of the assessee on CBDT instruction no.2/2015 dated 29/01/2015 is also not applicable to the facts of this case as this instruction was relating to the adjustment on account of issue of shares by an Indian company to its foreign A.E on a premium which is admittedly on the capital account and no income whatsoever was arising from the transaction.
Page 53 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined Conversely, in the case of the assessee, it has entered into foreign currency exchange transactions with it's A.E and the assessee is also registered foreign exchange dealer.
Therefore, the argument of the assessee that there is no income arises from this transaction is not factually correct.
4. In view of the detailed discussion above, the AO is requested to consider and initiate penalty under the provisions of sec.271AA of the Act amounting to Rs.55,01,708/- @2% of the value of the international transaction entered into by the assessee with the overseas Branch Offices amounting to Rs.27,50,85,382/- which have not been disclosed in form 3CEB and the assessee has also failed to benchmark this transaction as per the provisions of the Act."
40. Respondent no.1 has recorded the reasons for making reference under section 92CA of the Act as under :
"4. In response the assessee sought for adjournment till Page 54 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined 25.12.2019. Subsequently on 23.12.2019 the assessee filed reply stating that the transactions as mentioned in notice dated 13.12.2019 is not covered under provisions of section 92E and the same are not international transactions and that this is not a fit case for referring to TPO. The said transactions with overseas branch were mentioned at annexure 1A. 1B and 1C of reply dated 23,12.2019. These transactions are summarised as under:
Sr. NO. Particulars
1 Derivatives
2 Forex
3 Borrowing/lending
5. In this regard it is pertinent to mention that the said matter was discussed and deliberated at lengthy by the Ld TPO (Jt.DIT, TPO-1) vide order dtd 1.11.2019 for AY 2016-17 and the TPO has categorically directed the AO to initiate penalty u/s 271AA on the said transactions. Besides as per section 92CA(4), on receipt of order u/s 92CA(3) passed by the TPO, the AO shall proceed to compute the total income of the assessee in conformity with the ALP so determined by the TPO. The facts of AY 2017-18 and AY 2016-17 Page 55 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined are identical. The same was duly communicated to the assessee. Nevertheless, considering the request made by the assessee for personal hearing, one more opportunity was provided vide notice dated 23.12.2019 fixing the date of hearing at 24.12.2019.
However, in response no one
attended and no reply was
received.
6. In view of above, the following facts emerges:
The assessee has entered into international transactions with overseas branch/ Associated Enterprises Such transactions ought to have been disclosed in the Accountant's report under section 92E / Form 3CЕВ.
The assessee has failed to disclose these transactions in Form 3CEВ.
As per Para 3,3 of CBDT
Instruction 3/2016, the cases
selected for scrutiny on non
transfer pricing risk parameters but also having international transactions or specified domestic transactions shall be reported to TPO, where the Assessing Officer comes to know that the tax payer Page 56 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined has entered into international transactions or specified domestic transactions or both but the tax payers has either not field the Accountant's report under section 92E at all or has not disclosed the said transactions in the Accountant's report filed, then a reference to Transfer Pricing Officer shall be made to determine the Arm's Length price (ALP) of the transaction.
The assessee was afforded opportunities vide letters dated 13.12.2019 and 23.12.2019.
The request of personal hearing was also given to the assessee, however no compliance was made.
The Ld TPO in order u/s 92CA(3) dtd 01.11.2019 for AY 2016-17 has unambiguously stated that the assessee has failed to report and disclose international transactions with Associated Enterprises/ overseas branches.
The directions of TPO are binding on the AO. As per section 92CA(4), on receipt of order u/s 92CA(3) passed by the TPO, the AO shall proceed to compute the total income of the assessee in conformity with the ALP so determined by the TPO.
Page 57 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined The facts of AY 2017-18 and AY 2016-17 are identical.
The assessee has failed to
disclose international
transactions involving
derivatives, forex and borrowing / lending entered into with its' overseas branches/ Associated Enterprises.
In view of the above facts and on similar grounds and reasoning as mentioned in the order of TPO for AY 2016-17, I am satisfied 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 or specified domestic transaction. Hence this is a fit case for reference to PO for determination of ALP for international transactions."
41. On perusal of the above reasons together with the findings of the TPO for earlier Assessment Year 2016-2017 as reproduced here-in-above, it appears that the petitioner has failed to disclose international transaction involving Page 58 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined derivatives, forex and borrowing/lending entered into with its overseas branches/Associated enterprise and there is an income or a potential of an income arising and/or being affected on determination of the ALP of an international transaction or specified domestic transaction which are not disclosed. In such circumstances, it would be for the TPO to determine the ALP and no fault can be found for referring the case to the TPO by respondent no.1.
42. The contention raised on behalf of the petitioner that the case of the petitioner would not fall within the circumstances stated in the CBDT Instruction No. 3 of 2016 is concerned, the case would fall within para 3.3 clause(a) which stipulates Page 59 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined that where the AO comes to know that the taxpayer has entered into international transaction or specified domestic transaction or both but has not disclosed the said transaction in the Accountant's report filed, then after recording satisfaction as provided in clause 3.4, can refer the case to the TPO. On perusal of the clauses 3.3 and 3.4, it is apparent that the petitioner failed to disclose the international transaction between the Head Office and branches outside India in 3CEB report of the Chartered Accountant and therefore, after reasons are recorded and objections are considered and after considering the objections raised by the petitioner, approval was granted by the Principal Commissioner of Income Tax by letter dated 24.12.2019.
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43. This Court in case of Hitachi Hi Rel Power Electronics Pvt. Ltd.(supra) has considered the following two questions which are also arising in facts of the present case:
"[1] Whether it was incumbent on the A.O. to have given the writ applicant an opportunity of being heard before making a reference to the T.P.O. under Section 92CA(1) of the Act?
[2] Whether the Assessing Officer could be said to have overlooked the jurisdictional requirement of a satisfaction in accordance with para 3.4 of the instruction No.3 of 2016 that there ought to be an income or a potential of an income arising and/or being affected on determination of the A.L.P. of an international transaction or specified transaction? In the absence of recording of such satisfaction, as to the income or potential of an income, could it be said that the entire exercise undertaken by the A.O. is illegal?"Page 61 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025
NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined
44. This Court relied upon the decision of Delhi High Court in case of Indorama Synthetics (India) Ltd vs. Additional Commissioner of Income-tax reported in [2016] 71 taxmann.com 349 (Delhi) relied upon by the assessee as well as decision of this Court in case of M/s. Veer Gems vs. Assistant Commissioner of Income Tax -
Circle 7 and others rendered on 19th October, 2011 in Special Civil Application No.12648 of 2011 relied upon on behalf of the Revenue. The Delhi High Court disagreed with the decision of this High Court rendered in the case of M/s. Veer Gems (supra) on the issue whether the A.O. must provide an opportunity of being heard to the taxpayer before recording his satisfaction or otherwise and relying upon the decision of the Bombay High Court in Page 62 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined case of Vodafone India Services (P) Ltd v.
Union of India reported in (2013) 39 TC 201 Bombay held that an opportunity of hearing must be given. Whereas, this Court in M/s. Veer Gems (supra) took the view that having regard to the provisions under Chapter X, the A.O. is not obliged in any manner to hear the assessee and only obligation on the part of the A.O. is to consider the objections of the assessee and only thereafter make a reference to the T.P.O. to compute the Arm's Length Price.
45. This Court thereafter considering the Instruction No.3 of 2016 came to the conclusion that AO must provide an opportunity of being heard to the taxpayer before recording his satisfaction or otherwise accepting the dictum laid down Page 63 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined by Bombay High Court in case of Vodafone India Services (P) Ltd (supra) and followed by Delhi High Court in case of Indorama Synthetics (India) Ltd (supra) and came to the conclusion that opportunity of hearing must be provided to the taxpayer.
46. Reference was also made to Instruction No. 2 of 2015 dated 29.01.2015 issued by CBDT which is now replaced by Instruction No.03 of 2016 dated 10.03.2016 and thereafter arrived at the following conclusion :
"38 The following is discernible from the aforesaid:
[a] The tax can be charged only on income and in the absence of any income arising, the issue of applying the measure of Arm's Length Pricing to the transactional value / consideration itself would not Page 64 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined arise.
[b] If income is noticed, chargeable to tax under the normal provisions of the Act, then, alone Chapter X of the Act could be invoked.
39. We find substance in the contention raised by Mr. Soparkar that the A.O. could be said to have overlooked or rather ignored the jurisdictional requirement of a satisfaction in accordance with para 3.4 of the instruction No.3 of 2016 referred to above that there ought to be an income or potential of an income arising and/or being affected on determination of the A.L.P. of an international transaction or specified domestic transaction. In the absence of such satisfaction being recorded in the order disposing of the objections, the reference to the T.P.O. would also be without jurisdiction. We take notice of the fact that in the objections, a specific plea in this regard was taken, however, we do not find a word in this regard in the order disposing of the objections.
On this issue, the only reply of the learned Senior Counsel appearing for the Revenue is that the same is self-serving and adherence the record. In other words, the only argument is that the Arm's Length Price on the interest paid would have bearing on the income. We are not convinced with such stance of the Revenue.
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47. Considering the above decision of this Court in juxtaposition to the facts of the present case, it appears that respondent no.1 has made a proposal dated 24.12.2019 in a great hurry after issuing notice under section 142(1) of the Act calling upon the petitioner to furnish the accounts and documents specified therein on or before 24.12.2019 at 12:15 PM as per Annexure to such notice. Notice dated Page 66 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined 23.12.2019 and Annexure thereto reads as under:
"Notice under sub-section (1) of section 142 of the Income Tax Act, 1961 Sir/ Madam/ M/s, In connection with the assessment for the assessment year 2017-18 you are required to:
a) Furnish or cause to be furnished on, or before 24/12/2019 at 12:15 PM the accounts and documents specified overleaf.
b) Furnish and verified in the prescribed manner under Rule 14 of I.T. Rules 1962 the information called for as per annexure and on the points or matters specified therein on or before 24/12/2019 at 12:15 PM.
c) The above mentioned
evidence/information is to be
furnished online, electronically in 'E-Proceeding facility through your account in 'e-filing website of Income Tax Department
d) Para(s) (a) to (c) are applicable if you have an account in e-filing website of Income Tax Department.
Till such an account is created by you, assessment proceedings shall be carried out either through your e-
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e) In cases where order has to be passed under section 153A/153C of the Income Tax Act, 1961 read with section 143(3), assessment proceedings would be conducted manually.
Annexure Vide show-cause notice dated 13.12.2019 you were asked certain details of international transactions with overseas branches located at Srilanka, Dubai and Singapore which were not reported as required u/s 92E of the I.T. Act, 1961. Besides you were also requested to submit the details of transactions such as currency buy/sell transactions, currency swap transactions and lending/borrowing transactions with these overseas branches during the F.Y. 2016-17. The date for compliance was fixed on 18.12.2019.
2. In response you filed adjournment. Subsequently on 23.12.2019, you have contended that the impugned transactions are not liable to be referred to TPO. In this regard you have also requested for personal hearing.
3. In this regard as per clear and categorical findings of the PO vide order uls 92CA(3) for. AY 2016-17, Page 68 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined you have failed to disclose international transactions which were liable to be disclosed in Accountant's report under section 92E. Further as per section 92CA(4) on receipt of order u/s 92CA(3) passed by the TPO, the AO shall proceed to compute the total income of the assessee in conformity with the ALP so determined by the TPO. The facts for AY 2016-17 and AY 2017-18 are identical and hence failure on your part for disclosing such transactions makes your case fit to be referred to the TPO
4. As per Para 3.3 of CBDT.
Instruction 03/2016, the cases selected for scrutiny on non transfer pricing risk parameters but also having international transactions or specified domestic transactions shall be reported to TPO, where the Assessing Officer comes to know that the tax payer has entered into international transactions or specified domestic transactions or both but the tax payers has either not field the Accountant's report under section 92E at all or has not disclosed the said transactions in the Accountant's report filed, then a reference to Transfer Pricing Officer shall be made to determine the Arm's Length price (ALP) of the transaction.
5. In view of the above, you are once again hereby given opportunity for personal hearing at 24.12.2019 Page 69 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined at 12:15 pm, failing which it shall be presumed that you have nothing further to state in the said matter."
48. Such notice is admittedly issued at 10:03 PM on 23.12.2019 (Annexure-R/1 page 176 to 178).
49. Thereafter it is also apparent that respondent no.1 made a proposal to the Principal Commissioner of Income Tax-1 on the next day i.e. 24.12.2019 wherein it is recorded that one more opportunity was provided vide notice dated 23.12.2019 fixing the date of hearing on 24.12.2019 however, in response no one attended and no reply was received. Reasons for making transfer was also recorded on 24.12.2019 and thereafter the Principal Commissioner of Income Tax granted approval also on 24.12.2019. Thus the petitioner was never Page 70 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined provided any opportunity to make submissions as per notice dated 23.12.2019.
50. In such circumstances, it is apparent that while making reference to the respondent no.2, respondent no.1 has overlooked and ignored the jurisdictional requirement of providing an opportunity of hearing in accordance with para no. 3.4 of the Instruction No. 3 of 2016 when there ought to be income or a potential of an income arising and/or being affected on determination of the ALP of an international transaction or specified domestic transaction and merely reliance was placed on the Assessment Year 2016- 2017. It is also emerging from the undisputed facts of the case that further opportunity of hearing granted on Page 71 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined 23.12.2019 was only an empty formality resulting into breach of principle of natural justice.
51. For the foregoing reasons, the petition succeeds. The impugned reference made by respondent no.1 to respondent no.2 is hereby quashed and set aside and notice dated 30.12.2019 as well as the approval granted by Principal Commissioner of Income Tax dated 24.12.2019 are hereby quashed and set aside. The proceedings are remitted to the respondent no.1 Assessing Officer for fresh consideration of the matter to pass a fresh de novo reasoned order or speaking order after giving an opportunity of hearing to the petitioner and dealing with objections in accordance with law. Let the aforesaid exercise be undertaken within a period of Page 72 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025 NEUTRAL CITATION C/SCA/1717/2021 CAV JUDGMENT DATED: 18/03/2025 undefined twelve(12) weeks from the date of receipt of a copy of this order.
52. Petition is disposed of. Rule is made absolute to the aforesaid extent. No order as to costs.
(BHARGAV D. KARIA, J) (D.N.RAY,J) RAGHUNATH R NAIR Page 73 of 73 Uploaded by RAGHUNATH R NAIR(HC00196) on Wed Mar 19 2025 Downloaded on : Wed Mar 19 22:51:27 IST 2025