2016 (8) TMI 151 - HC - Income Tax

AO must provide hearing before referring to TPO or determining ALP under s.92C(3)/s.92CA(1); CBDT Instruction No.3/2016 applies

HC set aside three references made by the AO to the TPO for AYs 2011-12, 2012-13 and 2013-14 because the AO proceeded without affording the assessee an ... ALP determination - non affording the Petitioner an opportunity of being heard - Held that:- Assessee has not filed the Accountant’s report under Section 92E of the Act. Yet the AO has to proceed to determine the ALP under Section 92C (3) of the Act or refer the matter to the TPO to determine the ALP under Section 92CA (1) of the Act in case the Assessee has not declared one or more international transactions in the report filed under Section 92E of the Act. As explained in the above situations in para 3.2, the AO must provide an opportunity of being heard to the taxpayer before recording his satisfaction or otherwise. CBDT’s Instruction No. 15 of 2015 as replaced by CBDT Instruction No.3 of 2016 dated 10th March 2016 clarifies the correct legal position and cannot be construed as not applying to the facts on hand. Since it is a procedural aspect and is intended to the benefit to the Assessee, it requires to be applied even in the present case where a reference was earlier made by the AO to the TPO on 31st March 2013 and thereafter. Thus the Court is of the view that the three references made by the AO to the TPO on the question of determination of ALP of the alleged international transactions involving the Petitioner and its AE have been made without affording the Petitioner an opportunity of being heard as was required by law. This, as explained by the Bombay High Court in Vodafone India Services (P) Limited v. Union of India (2013 (12) TMI 547 - BOMBAY HIGH COURT ), and reaffirmed by the CBDT’s Instruction No. 3 of 2016, is a procedural requirement implicit in Section 92 CA (1) of the Act. Accordingly, the said three references made by the AO to the TPO for determination of the said question for the AYs 2011-12, 2012-13 and 2013-14 are hereby set aside. Issues Involved:1. Legality of the reference made by the Assessing Officer (AO) to the Transfer Pricing Officer (TPO) under Section 92CA of the Income Tax Act, 1961, without giving the petitioner an opportunity of being heard.2. Requirement for the AO to record reasons and provide a hearing before making a reference to the TPO.3. Applicability of the Central Board of Direct Taxes (CBDT) instructions regarding the procedure for making a reference to the TPO.Detailed Analysis:Issue 1: Legality of the Reference Made by the AO to the TPOThe central issue in the writ petitions is whether the reference made by the AO to the TPO for the determination of the Arm’s Length Price (ALP) of the international transactions was legal, given that the petitioner claimed it did not enter into any international transactions with an Associated Enterprise (AE) as defined under Section 92A of the Income Tax Act, 1961. The petitioner argued that the reference was illegal since no international transaction was involved, and thus, no reference for the determination of ALP could have been made by the AO to the TPO under Section 92CA of the Act.Issue 2: Requirement for the AO to Record Reasons and Provide a HearingThe petitioner contended, referencing CBDT Instruction No. 3 of 2003, that the AO was required to arrive at a prima facie determination based on the details provided in the Accountant’s report in Form 3CEB. The AO should have recorded reasons stating it was 'necessary and expedient' to refer the matter to the TPO and should have given the petitioner an opportunity of being heard before making such a reference. The petitioner relied on the Bombay High Court decision in Vodafone India Services (P) Limited v. Union of India, which held that a hearing requirement must be read into Section 92CA (1) where the jurisdiction of the AO to make such a reference is challenged by the assessee.Issue 3: Applicability of CBDT InstructionsThe petitioner argued that the CBDT Instruction No. 15 of 2015 recognized the necessity of giving the assessee a hearing before making a reference to the TPO. The respondent, however, argued that from a plain reading of Section 92CA (1), there was no requirement for a hearing before making a reference. The principles of natural justice would be satisfied as long as the assessee is given notice regarding the proposed reference and the objections thereto are considered by the AO.Discussion and Reasons:Jurisdictional PrerequisitesThe court noted that Chapter X of the Income Tax Act deals with the determination of ALP of international transactions. Section 92CA (1) requires the AO to be satisfied that the assessee has entered into an international transaction or specified domestic transaction. If the assessee raises an objection that it has not entered into any international transaction, the AO must deal with such an objection and record reasons for making a reference to the TPO.Hearing RequirementThe court concurred with the Bombay High Court's view in Vodafone India Services (P) Limited v. Union of India, which held that a hearing requirement must be read into Section 92CA (1) where the jurisdiction of the AO to make such a reference is challenged. The court noted that the CBDT Instruction No. 15 of 2015, replaced by Instruction No. 3 of 2016, clarified the correct legal position and required the AO to provide an opportunity of being heard to the taxpayer before recording satisfaction or otherwise.ConclusionThe court concluded that the references made by the AO to the TPO without affording the petitioner an opportunity of being heard were not in accordance with the law. The court set aside the references made for the Assessment Years 2011-12, 2012-13, and 2013-14. The AO was directed to determine afresh whether a reference should be made to the TPO after giving the petitioner an opportunity of being heard within the next 15 days. The AO was to issue a fresh order within four weeks of the hearing, stating whether it was necessary and expedient to make a reference to the TPO on the question of determination of the ALP of the international transactions. If aggrieved by the decision, the petitioner could seek appropriate relief in accordance with the law.Orders:The petitions were disposed of with no orders as to costs.