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2013 (12) TMI 547
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....O) passed in terms of Section 92CA of the Income Tax Act,1961 ("the Act"); and (b) the Draft Assessment Order dated 22 March 2013 passed by Assessing Officer(AO) in terms of Section 143(3) read with Section 144C (1) of the Act in consequence of order dated 28 January 2013 of the TPO. 3. Learned counsel for the petitioner has raised the following questions for consideration by this Court: (1) Whether the existence of a potentially taxable income or an expenditure (capital or revenue) that impacts computation of taxable income is a sine qua non for the invocation of jurisdiction under Chapter X ? (2) Whether Chapter X confers the jurisdiction to a) treat a transaction on the capital account as a revenue transaction, b) treat a single transaction of issue of shares as two transactions - viz. as that of issue of shares and of grant of a financial accommodation (equal to the difference in value of the arm's length price as determined and the issue price of shares), and to bring to tax a notional amount as interest foregone on this notional amount of financial accommodation? (3) Whether the provisions of Chapter X confer the po....
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.... of issue of equity shares does not affect income of the Company. However, out of abundant caution, the same is reported here." (e) On 30 August 2010, the Assessing Officer issued a notice under Section 143(2) to the petitioner for the purposes of carrying out scrutiny assessment; (f) On 11 July 2011, the Assessing Officer after obtaining the previous approval of the Commissioner of Income Tax referred all the transactions reported in Form 3 CEB dated 28 September 2009 by the petitioner to the TPO in accordance with Section 92CA(1). This reference to the TPO was for determining the ALP of the reported International Transactions; (g) On 14 December 2012, the TPO issued a show cause notice to the petitioner. In the above notice, in so far as relevant to these proceedings, the petitioner was, inter alia, called upon to show cause why: (i) the issue price (including the premium) of the equity shares to its holding company as declared by the petitioner should be accepted for the purposes of computing ALP under the Act; (ii) the ALP of the shares issued by the petitioner to its holding company be not determined on the basis of its Net Asset Va....
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....; (iii) The transaction was an International Transaction as is evident from the Explanation (i)(c) and (e) to Section 92B, which provides that capital financing and restructuring of business would be included within the meaning of International Transactions; (iv) The issue of shares by the petitioner to its holding company at lower premium then what is due, results in the petitioner subsidizing the price payable by the holding company. This deficit would be a loan extended by the petitioner to its holding company and such loan would have bearing on the profit of the assessee in terms of interest; (v) The ALP of the issue of equity shares by the petitioner to its holding company as determined by the Accountant under Section 92E was rejected on the ground that methodology of valuation adopted is not suitable to derive the ALP; (vi) The Transfer Pricing adjustment for the Assessment Years 200708 and 200809 have to be taken into account to determine the fair value of the Petitioner's business; (vii) Finally, the TPO determined the ALP of equity shares issued by the petitioner to its holding company as under:" 7.5 Determination o....
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....lue of shares issued by the petitioner to its holding company was treated as a deemed loan by the petitioner to its holding company. This deemed loan was sought to be charged with interest at 13.5% per annum. Consequently, the TPO arrived at the following transfer pricing adjustment as under:" 9.2.4 Computation of Arm's Length Price: Amount of Deemed Loan Rs.1308,91,21,344/ Period 6 months Arm's Length Interest Rate 13.50% p.a. Arm's Length Price @ 13.97% p.a. Rs.88,35,15,691/ 9.2.5 Price Received vis-A-vis the Arm's Length Price: The price charged by the assessee at Rs. Nil in the form of interest chargeable on the debts delayed from its Associated Enterprise is compared to the Arm's Length Price or interest as under: Arm's Length Interest Rs.88,35,15,691/- Interest received Rs. Nil Shortfall being adjustment u/s 92CA Rs.88,35,15,691/ The above amount of Rs.88,35,15,691/is treated as an adjustment u/s 92CA for the price chargeable as interest on the deemed loan to its AE for the F. Y. 200809. 10 Summary of TP adjustments The transfer pricing adjustments made in this order is....
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....ised objections before the DRP only with regard to the valuation/ quantification issue and not with regard to issue of jurisdiction viz: the issue of equity shares by the petitioner to its holding company does not affect income and is thus outside the ambit of Chapter X . This was for the reason that the issue of jurisdiction was the subject matter of challenge in this petition before the Court. 6. Affidavit in reply dated 23 September 2013 came to be filed by respondent No.3Dy. Commissioner of Income Tax, (Assessing Officer) for and on behalf of respondents, wherein, inter alia, the deponent has raised the preliminary objection that the writ petition is not maintainable as it is at the stage of draft assessment order and the petitioner has an effective alternate remedy before the DRP, which remedy the petitioner has already resorted to. Affidavit also deals with the petitioner's contentions on merits, which will be referred to hereinafter. The petitioner has filed affidavit in rejoinder dated 10 October 2013 dealing with the preliminary objection on maintainability and on merits. The Assessing Officer has filed surrejoinder dated 15 October 2013. 7. Learned counsel fo....
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.... a case where computation of income under section 92 has the effect of reducing the income chargeable to tax computed on the basis of entries made in the books of account. The emphasis again is on computation of income for the purposes of tax. (v) Subsection (3) of section 92C confers power on the Assessing Officer to compute ALP. It also provides that this can be done "during the course of any proceeding for the assessment of income". (vi) Even where the Assessing Officer himself does not determine the ALP but makes a reference to the Transfer Pricing Officer (TPO) under section 92CA and the TPO passes an order determining the arm's length price, subsection (4) provides that the Assessing Officer is to apply the said order "to compute the income of the assessee" in conformity with the arm's length price so determined by TPO. (D) "Income" is defined by section 2(24) as including - (i) profits and gains, (vi) any capital gains chargeable under section 45 and (xvi) any consideration received for issue of shares as exceeds the fair market value of the shares referred to in clause (viib) of subsection (2) of section 56. ....
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....nition of International Transaction by itself creates a legal fiction by which the ALP of an International Transaction is deemed to be income runs counter to the legislative material placed before this Court by them. It is submitted that the assessments in the present case are a mockery of the legislative intent. a) The Notes on Clauses refers to Section 92 as a new section to "provide that any income arising from an International Transaction shall be computed having regard to arms length price....", and the meanings of associated enterprise and International Transaction "..... with reference to which the income is to be computed under the new section." b) The Memorandum Explaining the Finance Bill 2001 refers to "MEASURES TO CURB TAX AVOIDANCE" and "New Legislation to curb tax avoidance by abuse of transfer pricing." It points out that "the profits derived by such enterprises carrying on business in India can be controlled by the multinational group, by manipulating the prices.... leading to erosion of tax revenue...". The provisions were inserted ".... With a view to provide a statutory framework which can lead in computation of reasonable fair and equitable pro....
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....% for 6 months has been computed on the deemed loan interest quantified at Rs.88.35 crores and thus the total transfer pricing adjustment of Rs.1397.26 crores is made. (K) The transfer pricing provisions have thus been used by the TPO and the AO to treat the alleged shortfall in the amount of share premium as income. It is vehemently submitted by Mr. Harish Salve that the TPO and the AO have turned the entire tax jurisprudence on its head by passing the impugned orders. (L) The issue of equity shares at a premium by the petitioner to its holding company is itself a process of creation of shares and thus would not be covered as a transfer as held by the Apex Court in Khoday Distilleries Ltd. v/s. CIT, 2009(1) SCC 256. In the above case, the Supreme Court held as under: "There is a vital difference between "creation" and "transfer" of shares................There is a difference between issue of a share to a subscriber and the purchase of a share from an existing shareholder. The first case is that of creation, whereas the second case is that of transfer of chose-in-action." Consequently, the issue of shares at a premium being sue generis would not ....
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....n would lead to imposition of penalty and would not only be arbitrary and violative of Article 14 but also violative of Article 19(1) (g) of the Constitution. In support of the aforesaid proposal reliance was placed upon the decision of the Apex Court in the matter of K. P. Varghese vs. ITO 1981 (4) SCC, 173. In view of the above, it is submitted by Mr. Salve that this Court should exercise its extra ordinary writ jurisdiction and entertain the petition as the alternative remedy is not an efficacious remedy. (O) The TPO while determining the ALP of the issue of equity shares by the petitioner to its holding company has treated the ALP determined in respect of transactions in earlier Assessment Years 200708 and 2008-09 as the sums actually received/receivable. This is not permissible as the ALP transaction for the earlier period only results in a tax being paid on proper value of the international transaction on the basis of ALP so determined for that transaction in that year. It does not have any carry forward effect. 8. Mr. Salve has also assailed the impugned order on the ground of breach of principles of natural justice: (a) The impugned orders of t....
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.... and challenged the jurisdiction of the authorities in applying Chapter X in respect of the issue of shares, inter alia, on the ground that it does not give any rise to any income. This is evident from Form 3 CEB dated 28 September 2009 filed by the petitioner along with its return of income and the replies filed by the petitioner to the show cause notice dated 14 December 2012 issued by the TPO; (b) The decision of this Court in W. P. No. 488 of 2012 rendered on 6 September 2013 (for convenience Vodafone II case), wherein this court refused to entertain a writ petition challenging proceeding under Chapter X for the Assessment Year 200809, is inapplicable to the present facts. This is for the reason that unlike in the above case, the petitioner had in these proceedings challenged the jurisdiction of the TPO and the Assessing Officer right from the beginning of the proceeding. Besides in this case, there are no disputed questions of fact as found in Vodafone II case; (c) Though after the filing of this petition on 24 April 2013, the petitioner has on 26 April 2013 filed objections against draft assessment order before the DRP, these objections were filed only with ....
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....ion, it has been held that the draft assessment order based on the order of the TPO could be challenged before the DRP on all grounds in its entirety including the issue of jurisdiction. Therefore, whether or not any income arises consequent to the international transaction of issue of shares at a premium to its holding company attracting the provisions of Chapter X is also amenable to challenge before the DRP; (c) The petition itself involves mixed questions of facts and law. The issue of transfer pricing involves valuation which is the result of facts based analysis which could be best done by the authorities under the Act. It was submitted that for this very reason, the respondents are not arguing on the merits, save and except to point out that once an International Transaction exists then the ALP has to be determined by the TPO; and 11. The learned Solicitor General further submitted that the Assessing Officer is under no obligation to give any hearing to an assessee before it makes a reference to the TPO under Section 92CA(1) . All that the Assessing Officer has to do is to reach a prima facie satisfaction that there is an international transaction and that the AL....
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....edy, the Court should not express any opinion on merits of the controversy between parties. That, however, does not absolve the respondent authority from its duty to Court to indicate a prima facie, probable or at-least a plausible defence when the Court calls upon the respondent authority to disclose its defence in a nutshell, after the petitioner makes out a strong prima facie case for invoking the jurisdiction of the High Court on the ground that the respondent authority has exfacie acted without jurisdiction. Otherwise, even in case of grossly arbitrary action or proceeding initiated without any jurisdiction whatsoever, the authority raising plea of alternate remedy, may remain silent on merits of the matter and expect the High Court to dismiss the writ petition on the ground of alternate remedy, requiring the petitioner to go through the labyrinth of appeals and revisions, hoping to tire the petitioner out in terms of time, energy and costs before he can approach the writ court again for adjudication of merits of the dispute. Authorities shall keep this caution in mind for future. 15. Now we will make a brief reference to the reply on merits in the affidavit in reply, where....
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.... the petitioner to tax. In view of the above circumstances, no submission on merits of the transactions were being made by the revenue at the bar; (b) Issue of share capital by a subsidiary to its holding company is normally liable to capital gains. This is evident from the fact that Section 47 provides for transactions not to be regarded as transfers for the purpose of capital gain. Attention was particularly drawn to Section 47 (vi) (d) which clearly provides that issue of shares in certain situation is regarded as transfer and may give rise to capital gains under Section 45 . Therefore, though this is not a case of demerger, the same is being relied upon so as to emphasize that conceptually an issue of share capital could be regarded as transfer giving rise to capital gains. Therefore, the difference between the ALP and the declared value would give rise to income. 17. The petitioner as well as the respondents have relied upon various decisions in support of their above submissions. We shall deal with the relevant case law cited by the counsel, where necessary, while considering their submissions. 18. The first issue which arises for our consideration is whether t....
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....r Indian company. Section 92B requires at least one of the parties to be a non-resident. As both the parties to the transaction were Indian companies, section 92B did not apply. There was no agreement between HWP (India) and the associated enterprise of the petitioner viz. VIH BV. The findings to the contrary are perverse and without jurisdiction." (c) The Division Bench held that the relevant question was whether call centre business was sold before or after the sale of the CGP share. Determination of that question was necessary to decide whether the transaction of sale of call centre business was an international transaction because after the sale of CGP share the authorities would be entitled to consider the petitioner as being in the Vodafone group. (para 187/page 189). (d) The Division Bench also noted that the completion date under the Share Purchase Agreement admittedly was 8 May 2007. The BTA was also dated 8 May 2007. The answer to the question whether the sale and purchase of the share preceded the sale of the call centre business or vice versa or whether they were simultaneous requires a consideration of facts, circumstances and factors, including the c....
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.... a caveat that the existence of alternate remedy by itself will not bar the Court from exercising its extra ordinary jurisdiction if the facts of the case so warrant. Moreover, we find that the Court while refusing to entertain the petition had on facts found that the petitioner had not challenged/ objected to the jurisdiction of the TPO at any time prior to filing the petition and on the contrary, the petitioner had actively participated in the proceedings before the TPO without raising any objections as to its jurisdiction. As against the above, in the present proceedings, the petitioner has from the very out set, been objecting to the jurisdiction of the authorities to apply Chapter X on issue of shares at a premium by it to its holding company. This is evident from the Form 3 CEB dated 28 September 2013 filed by the petitioner, wherein it was specifically stated by its accountant that the International Transaction of issuing shares at a premium to its holding company is not covered by Chapter X as the issue of shares does not give rise to or affect any income. Further, even while replying to the show cause notice dated 14 December 2012 issued by the TPO, the petitioner had i....
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....he Dispute Resolution Panel may confirm, reduce or enhance the variations proposed in the draft order so, however, that it shall not set aside any proposed variation or issue any direction under subsection (5) for further enquiry and passing of the assessment order." (emphasis supplied) Learned counsel for the petitioner further referred to powers of the Commissioner (Appeals) conferred by Section 251(1)(a) in the following terms: 251(1) In disposing of an appeal the Commissioner (Appeals) shall have the following powers (a) in an appeal against an order of assessment, he may confirm, reduce, enhance or annul the assessment. Thus the contention of the petitioner is that primary issue raised by it (viz: Chapter X is not applicable in view of the fact that no income arises and /or is affected) could never result in the draft assessment order being set aside by the DRP even if it is convinced of the petitioner's case. According to the petitioner the only jurisdiction the DRP has is with regard to quantification/valuation and therefore, this Court should exercise its writ jurisdiction. 25. On the above issue, the revenue has submitted in their writte....
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....e the entire draft order is before the DRP for confirmation, it is axiomatic that it would have the power to consider the entire draft assessment order, including the question as to whether the unreported transactions are international transactions or not or even whether what the TPO considered was a transaction at all. The Division Bench of the Gujarat High Court in Veer Gems (supra) also held that the issue whether there was an international transaction or not can also be examined by the DRP. 89 to 93......... 94. In the result, the petitioner has, in fact, more than one alternate remedy although not to the extent contended by the Advocate General. In view of our findings, the petitioner's remedy against the order of the TPO is not before the AO. The AO must make the assessment in conformity with the TPO's order. The AO is not entitled to either question the TPO's order in any respect or to make the assessment contrary thereto. However, the assessee is entitled to challenge not merely the determination of the arm's length price, but also the TPO's conclusion that a particular transaction is an international transaction before the DRP. Alterna....
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.... party to pursue two parallel proceedings at the same time. This would be particularly so when the alternative remedy provided under the Act provides for the petitioner obtaining the relief sought in the petition. However, in this case, we find that the petitioner has only filed its objections with regard to valuation/ quantification of the ALP and not with regard to jurisdiction. In its objections to the DRP, the petitioner has specifically noted as under: "Accordingly, since the issues involved in the present case relate to jurisdiction of the AO/TPO and the applicability of transfer pricing provisions, the remedy before the DRP is not efficacious. The Assessee has, therefore, filed a Writ Petition before the Bombay High Court assailing the jurisdictional issues arising out of the TP Order and the Draft Assessment Order. The Assessee, by way of the present objections, is only assailing valuation/ quantification issues involved in the present transaction before the DRP." The petitioner has reserved its rights to file objections with regard to jurisdiction in case the Court does not interfere with the petition. Therefore, the petitioner could now file objections with re....
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....action) under section 92C to the Transfer Pricing Officer. (emphasis supplied) (c) The Constitution of the DRP as constituted consists of one Director of Income Tax (Transfer Pricing). In terms of Instruction No.3/2003 dated 20 May 2003, a person of equal rank i.e. Directorate of Income Tax (Transfer Pricing) has to approve the speaking order passed by TPO. Therefore, the appeal provided from the draft assessment order is illusory being an appeal from Ceaser to Ceaser's wife. We shall now examine each of the above contentions. 32. It is clear that in view of Section 92(1), there must be income arising and/or affected or potentially arising and/or affected by an International Transaction for the purpose of application of Chapter X . This would appear to be in the nature of jurisdictional requirement and the Assessing officer must be satisfied that there is an income or a potential of an income arising and/or being affected on determination of an ALP before he proceeds further in determining the ALP or referring the issue to the TPO to determine the ALP. In this case, we find that the petitioner has from the very beginning been challenging the jurisdiction to apply Chapte....
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....he proceedings under Chapter X or at the stage of passing an assessment order. 34. However, in cases of transaction referred to the TPO, it would be for the Assessing Officer to first determine the issue of any income arising and/or being affected or potentially arising on determination of ALP before referring the transaction to the TPO, when specifically contended by the petitioner/Assessee. This is also indicated in Section 92CA(1) which requires an Assessing officer to refer an International Transaction for determination to the TPO only if he considers it "necessary or expedient" to refer the mater to the TPO. The exercise of finding out whether any income arises and/or is affected or potentially arises and/or is affected by the International Transaction would certainly be a factor to determine whether or not it is necessary or expedient to refer the matter to the TPO. In case no objection is raised by the assessee to the applicability of Chapter X then the prima facie view of the Assessing officer would be sufficient before referring the transaction to the TPO for determining the ALP. However where an objection is raised about the applicability of Chapter X by an assessee th....
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....n conformity with the ALP determined by the TPO. Amended Section 92CA(4) reads as under: S. 92CA(4) On receipt of the order under subsection (3), the Assessing Officer shall proceed to compute the total income of the assessee under subsection (4) of section 92C in conformity with the arm's length price as so determined by the Transfer Pricing Officer. (emphasis supplied) Therefore in the context of the preamendment law as then existing hearing on jurisdictional issues could take place after the order of the TPO which is not possible post amendment of 2007. In any case, the fact situation existing in this case of viz. a question of jurisdiction was not in issue in the above cases and therefore these two cases can have no application to the present case. 37. So far as the decision of the Gujarat High Court in Veer Gems case is concerned, it deals with the post amended Section 92CA(4) and holds that no hearing need be given by the Assessing Officer before making a reference to the TPO even in respect of jurisdictional issue. This was based on the reasoning that the jurisdictional issue can be decided by the Assessing Officer while framing the assessment Ord....
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....essee in that case and,therefore, principles of natural justice were required to be followed. The same should be done by the TPO in all cases. 40. In our view, once the AO gives hearing to the assessee before making a reference to TPO, the TPO would be bound by formation of opinion of AO that there was international transaction in the relevant year and that income arises or is affected by the international transaction and the TPO is bound to determine the ALP of the international transaction under consideration, since ultimately it is the duty and responsibility of AO to assess chargeable income of the assessee on the basis of the provisions . Hence, there would be sufficient compliance with the principles of natural justice, if AO gives an opportunity of hearing to the assessee. Normally when the assessee files his return along with a copy of the Accountant's report under Section 92E the applicability of Chapter X may be an admitted position. However we may add a caveat and that is: where the assessee objects to the jurisdiction under Chapter X being exercised then hearing is required to be given by the Assessing officer to the assessee to consider whether it is necessary and e....
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....fore the above case of Castleton (supra) does not support the revenue. 44. The learned Solicitor General submitted that the action of AO in referring the international transaction to TPO is a mere administrative act, because as per CBDT Instruction No.3 dated 20 May 2003, AO is to exercise powers under Section 92C where the value of the transaction is upto Rs.5 crores (now revised to Rs.15 crores) and AO is required to refer the transaction to TPO where even the value of the international transaction exceeds Rs. 5 crores (now exceed Rs.15 crores). It is, therefore, submitted that in view of the above Circular, AO has no discretion in the matter and, therefore, AO hearing the assessee before making reference to TPO would be an empty formality and a futile exercise. 45. We are unable to accept the above submission of the revenue. CBDT Circular regarding distribution of files depending on value of transaction cannot detract from the obligation of AO to follow the principles of natural justice, which we have read into Section 92(A)(1), because once AO refers the transaction to TPO, AO will be bound to act in conformity with the order of TPO, as mandated by Sec.92 CA(4), in all re....
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....ion 144C(5) . The DRP procedure can only be initiated by an assessee objecting to the draft assessment order. This would enable correction in the proposed order(draft assessment order) before a final assessment order is passed. Therefore, we are of the view that in the present facts this issue could be agitated before and rectified by the DRP. 48. We now take up for consideration the ground based on the constitution of the DRP: one of the members is the Director of Income Tax (Transfer Pricing). In terms of CBDT Instruction No.3/2003 a Director of Income Tax(Transfer Pricing) is required to approve the order passed by the TPO on the ALP. Hence it is submitted that the hearing before the DRP would not be fair hearing as a person of equal rank has already approved the order of TPO. 49. This submission completely overlooks the fact that the proceedings before the DRP are not appeal proceeding but a proceeding to finalize the assessment on the basis of the draft assessment order. Besides, the DRP consists of three members and does not have the Director of Income Tax (Transfer Pricing) in particular who had approved the order of the TPO as a member. In these circumstances, we do n....
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....ompany falling under Section 56 receives share premium in excess of fair market value of such shares, that such excess premium would be chargeable to income tax. The revenue's case in the present matter is that the share premium was less than the fair market value of the shares issued by the petitioner. Secondly, the petitioner has heavily relied upon the decision of the Supreme Court in Khoday Distilleries Ltd. vs. CIT (2009) 1 SCC 256 (261) laying down that issue of shares to a subscriber is creation of shares, whereas purchase of shares from an existing shareholder is transfer of share. Hence, there is no question of taxing the difference between alleged fair market price of the shares issued by the petitioner to its holding company and the issue price as capital gains as contended by the revenue in its reply affidavit. 52. The assessee is entitled to have its preliminary objection (against chargeability of the alleged short fall in share premium) dealt with. Not a single authority has so far dealt with this issue and even the learned counsel for the revenue did not address us even briefly on merits of this controversy to show a plausible prima facie defence ( though the ....