Court quashes tax officer's reference, orders fresh assessment. Time limit extended.

The court allowed the writ application, quashing the reference made by the Assessing Officer to the Transfer Pricing Officer and the impugned notice. The proceedings were remitted to the Assessing Officer for fresh consideration with a direction to provide an opportunity of hearing to the applicant and pass a reasoned order. The court extended the limitation period for assessment by the duration of the stay on proceedings before the Transfer Pricing Officer.

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Issues Involved:
1. Opportunity of Hearing before Reference to Transfer Pricing Officer (TPO)
2. Jurisdictional Requirement of Satisfaction for Potential Income Impact

Detailed Analysis:

1. Opportunity of Hearing before Reference to Transfer Pricing Officer (TPO):

The writ applicant, a limited company, challenged the reference made by the respondent No.1 (Assessing Officer) to respondent No.2 (TPO) under Section 92CA(1) of the Income Tax Act for the computation of Arm’s Length Price (ALP), arguing that it was done without giving an opportunity of hearing. The applicant contended that the failure to disclose the international transaction of a loan of Rs. 20 Crore in the Form 3CEB was the basis for the reference, which was made without the necessary jurisdictional satisfaction as required by para 3.4 of the instruction 3/2016.

The court analyzed the necessity of providing an opportunity of hearing before making a reference to the TPO. It referred to the Delhi High Court's judgment in Indorama Synthetics (India) Ltd, which emphasized that the Assessing Officer (AO) must provide a hearing to the taxpayer before making such a reference, especially when the taxpayer challenges the jurisdiction. The Delhi High Court disagreed with the Gujarat High Court's decision in M/s. Veer Gems, which stated that the AO is not obliged to hear the taxpayer before making a reference to the TPO.

The court noted that the CBDT had accepted the legal position as explained by the Bombay High Court in Vodafone India Services (P) Ltd, which required an opportunity of hearing to be given before making a reference to the TPO. Consequently, the court held that the AO should have provided an opportunity of hearing to the writ applicant before overruling the objections and referring the matter to the TPO.

2. Jurisdictional Requirement of Satisfaction for Potential Income Impact:

The court examined whether the AO had overlooked the jurisdictional requirement of recording satisfaction that there is an income or a potential of an income arising and/or being affected by the determination of the ALP of an international transaction, as mandated by para 3.4 of the instruction 3/2016. The writ applicant argued that the AO failed to record such satisfaction, making the reference to the TPO illegal and without jurisdiction.

The court referred to the CBDT's instruction No.3 of 2016, which replaced instruction No.15 of 2015, and emphasized the necessity of the AO recording satisfaction about the potential income impact before making a reference to the TPO. The court found that the AO did not record any satisfaction regarding the potential income impact in the order disposing of the objections, thereby failing to meet the jurisdictional requirement.

The court also referred to the Bombay High Court's decision in Vodafone India Services (P) Ltd, which held that tax can only be charged on income, and in the absence of any income arising, the issue of applying the measure of ALP to the transactional value does not arise. The court concluded that the AO's failure to record satisfaction as to the potential income impact rendered the reference to the TPO without jurisdiction.

Conclusion:

The court allowed the writ application, quashing the reference made by the respondent No.1 to respondent No.2 and the impugned notice dated 20th December 2019. The proceedings were remitted to the AO for fresh consideration, with a direction to provide an opportunity of hearing to the writ applicant and to pass a reasoned order dealing with the objections in accordance with law. The court agreed with the Revenue on the point of limitation, clarifying that the limitation period for assessment would be extended by the period during which the proceedings before the TPO were stayed.

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