Court quashes order on SDT classification, citing lack of jurisdiction & violation of natural justice.

HDFC Bank Ltd. Versus Assistant Commissioner of Income Tax, 2 (3) (1), Mumbai, Deputy Commissioner of Income Tax] (Transfer Pricing) 2 (2) (2), Mumbai, Commissioner of Income Tax -2, Mumbai And Union of India, Through the Secretary] Department of Revenue, New Delhi

HDFC Bank Ltd. Versus Assistant Commissioner of Income Tax, 2 (3) (1), Mumbai, Deputy Commissioner of Income Tax] (Transfer Pricing) 2 (2) (2), Mumbai, ... Issues Involved:
1. Jurisdiction and legality of the impugned order and reference.
2. Classification of transactions as Specified Domestic Transactions (SDTs).
3. Compliance with principles of natural justice.

Issue-wise Detailed Analysis:

1. Jurisdiction and Legality of the Impugned Order and Reference:
The petitioner, a bank, challenged the order dated 29th December 2016, which classified certain transactions as SDTs under section 92BA(i) of the Income Tax Act, 1961, and referred them to the Transfer Pricing Officer (TPO) for determining the Arm's Length Price (ALP). The petitioner argued that the order and reference were ex-facie without jurisdiction, illegal, unsustainable, and contrary to the principles of natural justice and law. The court noted that the petitioner had filed its income assessment for the Assessment Year (A.Y.) 2014-15 and disclosed certain SDTs in Form 3CEB. However, the petitioner received a show cause notice from the respondent for non-reporting of certain related party transactions, which were not reflected in Form 3CEB. The court found that the impugned order and reference were made without proper jurisdiction and contrary to the principles of natural justice.

2. Classification of Transactions as Specified Domestic Transactions (SDTs):
The court examined whether the transactions in question fell within the meaning of SDTs under section 92BA(i) of the Income Tax Act, 1961, which involves transactions between the assessee and a person referred to in section 40A(2)(b) for an expenditure in respect of which payment has been made or is to be made. The court analyzed each transaction in detail:

a. Loans Purchased from HDFC Ltd.:
The petitioner argued that the transaction did not relate to A.Y. 2014-15 but to A.Y. 2013-14, and that HDFC Ltd. did not hold more than 20% of the shareholding individually. The court held that HDFC Ltd. did not have a substantial interest in the petitioner as required under section 40A(2)(b)(iv) since it held only 16.39% of the shares. The court rejected the Revenue's argument to club the shareholding of HDFC Ltd. with its subsidiary, HDFC Investments Ltd., to cross the 20% threshold. The court also held that the purchase of loans was not an expenditure but an asset acquisition, and thus, did not fall within the ambit of section 92BA(i).

b. Payment to HBL Global Pvt. Ltd.:
The petitioner contended that it did not have any direct shareholding in HBL Global, and the transaction could not be termed as an SDT. The court agreed, stating that the petitioner could not be regarded as the beneficial owner of the shares of HBL Global held by ADFC Ltd., as the beneficial owner of these shares was ADFC Ltd. The court held that the transaction did not fall within section 40A(2)(b)(vi)(B).

c. Payment of Interest to HDB Welfare Trust:
The petitioner argued that the trust was established for the welfare of its employees, and the beneficiaries were the employees, not the petitioner. The court held that the transaction did not fall within explanation (b) to section 40A(2)(b), as the petitioner was not entitled to at least 20% of the profits of the trust.

3. Compliance with Principles of Natural Justice:
The court found that the principles of natural justice were violated as the petitioner was not given a proper opportunity to respond to the show cause notice. The notice was served at 1:29 a.m. on 29th December 2016, requiring a response by 11:00 a.m. on the same day, and no personal hearing was granted. The court noted that the impugned order and reference were made in undue haste, violating the principles of natural justice.

Conclusion:
The court allowed the writ petition, quashing the impugned order and reference dated 29th December 2016. The court held that the transactions in question did not fall within the meaning of SDTs under section 92BA(i) of the Income Tax Act, 1961, and the impugned order was contrary to the principles of natural justice. The court made the rule absolute without any order as to costs.