Transactions between assessee and UK entities fall outside transfer pricing provisions under section 92A

The ITAT Mumbai held that the assessee, Ambico UK and Narayan UK do not qualify as associated enterprises under section 92A of the Income Tax Act. The DRP erred in applying only sub-section (1)(b) without considering sub-section (2) requirements. The Revenue failed to establish that the entities fell within the deeming provisions of section 92A(2)(a) to (m). Consequently, transactions between these parties fall outside transfer pricing provisions. The tribunal also found the TPO reference under section 92CA(1) procedurally defective as no proper show cause notice was served before making the reference, violating natural justice principles. Both grounds of appeal were allowed in favor of the assessee.

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Issues Involved
1. Whether the assessee, Ambico UK and Narayan UK are Associated Enterprises (AEs) as defined under section 92A of the Income Tax Act.
2. Whether proper show cause notice was served to the assessee by the Assessing Officer before making reference to the Transfer Pricing Officer (TPO) under section 92CA(1) of the Act.

Issue-wise Detailed Analysis

Issue 1: Determination of Associated Enterprises (AEs)
The primary issue revolves around whether the assessee's transactions with Ambico UK and Narayan UK fall under the purview of Transfer Pricing provisions, specifically if these entities qualify as Associated Enterprises (AEs) under section 92A of the Income Tax Act.

Legal Framework and Interpretation:
- Section 92A(1) defines "associated enterprise" based on participation in management, control, or capital.
- Section 92A(2) lists specific scenarios (clauses (a) to (m)) that further clarify when enterprises are deemed to be AEs.

Arguments by the Assessee:
- The assessee argued that Ambico UK and Narayan UK do not meet the criteria specified in section 92A(2), despite any participation in management, control, or capital.
- The assessee cited several Tribunal decisions (Orchid Pharma Ltd., ACIT vs. Veer Gems, Kaybee Pvt. Ltd., Page Industries Ltd.) to support the argument that both subsections (1) and (2) of section 92A must be read together.

Arguments by the Revenue:
- The Revenue contended that the common shareholding and control by Harshad Danesh Patel in both the Indian and UK entities qualify them as AEs under section 92A(1)(b).

Tribunal's Findings:
- The Tribunal emphasized that section 92A(1) and 92A(2) must be read together, and both conditions must be satisfied for entities to be considered AEs.
- Citing multiple precedents, the Tribunal concluded that the mere fact of participation in management, control, or capital is insufficient without meeting the specific conditions in section 92A(2).

Conclusion:
- The Tribunal held that the assessee, Ambico UK, and Narayan UK do not qualify as AEs under section 92A, as the conditions in section 92A(2) were not satisfied.
- Consequently, the transactions between these entities are outside the realm of Transfer Pricing provisions, and the ground No. 1 of the appeal was allowed.

Issue 2: Proper Show Cause Notice Before Reference to TPO
The second issue concerns whether the Assessing Officer provided a proper show cause notice to the assessee before referring the matter to the TPO under section 92CA(1).

Arguments by the Assessee:
- The assessee claimed that no formal show cause notice was issued, only a direction to file an affidavit, which does not fulfill the requirement of a proper notice.
- The assessee cited CBDT Instruction No. 3/2016, which mandates providing an opportunity of hearing before making a reference to the TPO.

Arguments by the Revenue:
- The Revenue argued that the assessee was given opportunities to file objections through order sheet entries and participated in the TP proceedings without raising further objections.

Tribunal's Findings:
- The Tribunal referred to CBDT Instruction No. 3/2016 and relevant case law (Indorama Synthetics (India) Ltd. vs. Addl. CIT, Vodafone India Services Pvt. Ltd. vs. Addl. CIT) to assert that a proper show cause notice is a procedural requirement implicit in section 92CA(1).
- The Tribunal found that the Assessing Officer failed to issue a proper show cause notice, which is a foundational requirement for legal proceedings.

Conclusion:
- The Tribunal concluded that the reference to the TPO was procedurally flawed due to the lack of a proper show cause notice, rendering the reference invalid.
- Given the Tribunal's decision on the first issue, the second issue became academic, and the reference to the TPO was set aside.

Final Judgment
The appeal by the assessee was partly allowed. The Tribunal ruled that the assessee, Ambico UK, and Narayan UK are not Associated Enterprises under section 92A, and the reference to the TPO was procedurally incorrect due to the absence of a proper show cause notice. The order was pronounced in the open court on March 30, 2021.

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