2013 (12) TMI 547 - HC - Income Tax

AO must decide Chapter X applicability objections before TPO referral under transfer pricing rules

Vodafone India Services Pvt. Ltd. Versus Union of India, Addl. Commissioner of Income Tax, Dy. Commissioner of Income Tax

Vodafone India Services Pvt. Ltd. Versus Union of India, Addl. Commissioner of Income Tax, Dy. Commissioner of Income Tax - [2014] 361 ITR 531 Issues Involved:1. Jurisdiction under Chapter X of the Income Tax Act, 19612. Treatment of Capital Transactions as Revenue Transactions3. Determination of Arm's Length Price (ALP) for Transactions in Later Years4. Breach of Natural Justice5. Constitution of the Dispute Resolution Panel (DRP)Detailed Analysis:1. Jurisdiction under Chapter X of the Income Tax Act, 1961The petitioner challenged the jurisdiction under Chapter X, arguing that the existence of potentially taxable income is a sine qua non for invoking Chapter X. The court noted that Section 92(1) requires income arising from an international transaction to be computed having regard to the ALP. The Assessing Officer (AO) and Transfer Pricing Officer (TPO) must determine whether income arises or is affected by the international transaction before proceeding under Chapter X. The court found that this jurisdictional issue was not addressed by either the AO or the TPO, which is a significant oversight.2. Treatment of Capital Transactions as Revenue TransactionsThe petitioner argued that Chapter X does not confer jurisdiction to treat capital transactions as revenue transactions or to treat the issuance of shares as a financial accommodation. The court acknowledged that the issue of shares is a capital transaction and not a revenue transaction, as supported by the Supreme Court's decision in Khoday Distilleries Ltd. v. CIT. The court emphasized that the legislative intent of Chapter X is to address tax avoidance on taxable income, not to create new heads of income.3. Determination of Arm's Length Price (ALP) for Transactions in Later YearsThe petitioner contested the TPO's approach of determining the ALP based on previous years' adjustments. The court noted that the TPO's determination of ALP should be based on the current year's transactions and not influenced by past adjustments. The court directed that the DRP should consider this issue and ensure that the ALP determination is appropriate for the current assessment year.4. Breach of Natural JusticeThe petitioner claimed a breach of natural justice, arguing that no hearing was given before the AO referred the matter to the TPO. The court held that when an assessee objects to the applicability of Chapter X, a hearing must be provided by the AO before making a reference to the TPO. This ensures that the jurisdictional issue is considered at the threshold, preventing unnecessary determination of ALP if Chapter X is not applicable.5. Constitution of the Dispute Resolution Panel (DRP)The petitioner raised concerns about the constitution of the DRP, arguing that it includes a Director of Income Tax (Transfer Pricing), who may have approved the TPO's order. The court dismissed this concern, noting that the DRP consists of three members and does not necessarily include the same Director who approved the TPO's order. The court found no merit in this objection.Conclusion:The court directed the petitioner to submit preliminary objections to the DRP within two weeks, focusing on jurisdictional issues. The DRP was instructed to decide the jurisdictional issue as a preliminary matter within two months. If the DRP's decision on jurisdiction is adverse, the petitioner may challenge it in a writ petition. The court emphasized the need for the revenue authorities to consider objections to the applicability of Chapter X before proceeding with ALP determination, ensuring compliance with principles of natural justice.