2011 (10) TMI 262 - HC - Income Tax

Judicial Validation of Assessing Officer's Referral to Transfer Pricing Officer

The court upheld the validity of the reference made by the Assessing Officer to the Transfer Pricing Officer (TPO), dismissing the petitioner's challenge. ... Power of AO to make reference to TPO - opportunity to the assessee - Transfer Price - Associated Enterprise - Assessee contended, purchases exceeding 90% of the raw materials for manufacturing have not been made from one enterprise and thus, there is no requirement of filing report under Section 92E of the Act- AO referred the case to TPO - Held that:- we do not find that under the scheme of the provision contained in Section-X of the Act, the Assessing Officer is obliged to grant hearing to the assessee, invite and consider the objections with respect to the question whether during the previous year relevant to the assessment year under consideration, there had been any international transaction between the assessee and the associated enterprise before making a reference to the TPO. Such opinion the Assessing Officer would have to form on the basis of available material on record and such opinion would be having ad-hoc finality in the sense that for the purpose of reference to the TPO and till the stage that the TPO passes an order under sub-section (3) of Section 92CA of the At, such issue would be closed. - no need to give persoanl hearing to the assessee before referring case to TPO. Determination of transaction - statutory change to section 92CA - binding nature of opinion of TPO - held that:- By virtue of newly substituted sub-section (4) of Section 92CA of the Act, the Assessing Officer is now bound by the order of the TPO on the computation of the arm’s length price of an international transaction, the Assessing Officer is not and cannot be stated to be bound by the opinion of the TPO with respect to the question whether there had, in fact, been an international transaction between the assessee and the associated person during the period under consideration. The TPO is not called upon to and, as held by us, is not competent to decide this issue. This issue is within the sole jurisdiction of the Assessing Officer. Powers of DRP - The issue whether there was an international transaction or not can also be examined by the Dispute Resolution Panel at the instance of the assessee. There is nothing to limit the powers of Dispute Resolution Panel to completely nullify the variations arising out of the order of the TPO if it is found that there had, in fact, been no international transaction and that, therefore, the reference itself was invalid. Sub-section (5) of Section 144C of the Act empowers the Dispute Resolution Panel to issue such directions as it thinks fit for the guidance of the Assessing Officer. When sub-section (8) of Section 144C of the Act authorizes the Dispute Resolution Panel to confirm, reduce or enhances the variations proposed by the TPO, it can also annul any computations proposed on the basis of the order of the TPO.Reference of TPO - action of AO - held that:- This is not to suggest that the Assessing Officer can, without any basis or wholly arbitrarily at his whim or caprice, make a reference of any transaction to the TPO for computation of the arm’s length price. He is expected to exercise his discretion on the basis of available material on record. Such decision is subject to approval by the Commissioner. At the time of framing final assessment even the assessee will have right to point out that there had been, in fact, no international transaction between the assessee and the associated enterprise. - TPO is not authorized to judge whether there had been any international transaction or not. In other words, he has no competence to decide the validity of the reference itself. Such issue has to be decided by the Assessing Officer alone.Petition against the notice of TPO dismissed. Issues Involved:1. Validity of the reference made by the Assessing Officer to the Transfer Pricing Officer (TPO).2. Jurisdiction of the TPO to determine the existence of an international transaction.3. Requirement of filing audit reports under Section 92E of the Income Tax Act, 1961.4. Applicability of transfer pricing provisions to the transactions between the petitioner and M/s. Blue Gems BVBA.5. Procedural requirements and safeguards before making a reference to the TPO.6. Rights and remedies available to the petitioner during the assessment process.Issue-wise Detailed Analysis:1. Validity of the Reference Made by the Assessing Officer to the TPO:The petitioner challenged the reference made by the Assessing Officer to the TPO under Section 92CA(1) of the Income Tax Act, 1961, claiming it was without jurisdiction. The petitioner argued that no international transaction was entered into during the relevant assessment year (2008-09). The court held that the Assessing Officer must form an opinion based on available material that an international transaction occurred before making a reference to the TPO. The court concluded that the Assessing Officer's reference was valid as it was based on the previous year's transactions and the absence of the required audit report under Section 92E for the current year.2. Jurisdiction of the TPO to Determine the Existence of an International Transaction:The court clarified that the TPO's role is limited to determining the arm's length price of an international transaction upon a valid reference by the Assessing Officer. The TPO does not have the jurisdiction to decide whether an international transaction exists. The court found the TPO's notice calling upon the petitioner to show cause why the transaction should not be subject to transfer pricing proceedings to be erroneous.3. Requirement of Filing Audit Reports Under Section 92E:The petitioner contended that there was no requirement to file an audit report under Section 92E as the transactions did not qualify as international transactions under Section 92A. The court noted that the petitioner had filed the necessary report for the previous year, indicating an international transaction with M/s. Blue Gems BVBA. The absence of such a report for the current year led the Assessing Officer to reasonably believe that an international transaction existed, justifying the reference to the TPO.4. Applicability of Transfer Pricing Provisions:The petitioner argued that the transactions with M/s. Blue Gems BVBA were not subject to transfer pricing provisions as the entity was not an associated enterprise under Section 92A. The court examined the statutory definitions and found that the entities were controlled by the same family, satisfying the criteria under Section 92A(2)(j), (k), and (m). Therefore, the transactions were deemed international transactions subject to transfer pricing provisions.5. Procedural Requirements and Safeguards Before Making a Reference to the TPO:The court emphasized that the Assessing Officer must consider it necessary or expedient to make a reference and obtain the previous approval of the Commissioner. The court found that these procedural safeguards were in place, and the reference was made based on a reasonable belief of an international transaction. The court rejected the petitioner's claim that a hearing was required before making the reference.6. Rights and Remedies Available to the Petitioner During the Assessment Process:The court highlighted that the petitioner has the right to contest the existence of an international transaction during the final assessment. The petitioner can also raise objections before the Dispute Resolution Panel under Section 144C, which has the power to annul any computations based on the TPO's order if it finds no international transaction occurred. The court dismissed the petition, stating that the petitioner would have sufficient opportunities to present its case during the assessment process.Conclusion:The court dismissed the petition, upholding the validity of the reference made by the Assessing Officer to the TPO. It clarified the roles and jurisdictions of the Assessing Officer and the TPO, emphasizing the procedural safeguards and remedies available to the petitioner during the assessment process. The court found that the transactions between the petitioner and M/s. Blue Gems BVBA were subject to transfer pricing provisions, and the petitioner had the opportunity to contest this during the assessment.