TaxTMI 
TaxTMI 
2017 (11) TMI 1137
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....s. 7,80,74,2921- u/s. 92CA of the Income Tax Act, 1961 towards interest chargeable on Share Application Money Pending Allotment with AEs, and the reasons assigned for doing so are wrong and contrary to the facts and circumstances of the case, provisions of the Income Tax Act, 1961 and Rules made thereunder. 1.2 On the facts and in the circumstances of the case and in law, the authorities below erred in making an upward transfer pricing adjustment in respect of interest chargeable on Share Application Money Pending Allotment without appreciating the fact that said transaction being capital in the nature, no additions could be made which is wrong and contrary to the facts and circumstances of the case, provisions of the Income Tax Act, 1961 and Rules made thereunder. 1.3 Without prejudice to the above, on the facts and in the circumstances of the case and in law, the authorities below erred in determining the Arm's length interest rate on the share application money pending allotment with its AE's @353% p.a. without appreciating the fact that share application money has been given to the foreign Associate Enterprises in Foreign Currencies, the price chargeab....
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....isions of Income Tax Act 1961, and Rules made there under. The appellant craves leave to add, alter, amend and/or modify all or any of the above grounds of appeal on or before the date of hearing. 2. The brief facts of the case are that the assessee company is engaged in exploration, extraction, production of all kinds of oils including petroleum crude oil. For the year under consideration, the assessee has no business activity except receipt of interest income. In the assessment proceedings, a reference under section 92CA(1) of I. T. Act, 1961 was made to the Transfer Pricing Officer, Mumbai for the determination of Arm's Length Price in relation to the international transactions entered into by the assessee company with its Associate Enterprises. The AO after obtaining the approval of the Pr.CIT-3, Mumbai. The Transfer Pricing Officer (TPO) vide order u/s.92CA(3) dated 05.11.2015 suggested an adjustment to the tune of Rs. 7,80,74,292 to the Arm's Length Price reported by the assessee in Form 3CEB. Accordingly, a draft assessment order was framed by proposing adjustment of Rs. 7,80,74,292 to the total income u/s. 92CA(3) of the Act. Against the said draft asses....
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....e cannot determine the existence of an 'International Transaction' at a price and as such doing so is wrong and contrary to the facts and circumstances of the case, provisions of the Income Tax Act, 1961 and Rules made there under. 1.9 On the facts and in the circumstances of the case and in law, the action of learned Assessing Officer (AO) of making reference to TPO is bad in law as the Ld. AO has not dealt with the appellants objection that the transaction in question is not an international transaction and without reaching to a finding that the transaction in question is an International Transaction and he thereby erred in making an upward adjustment of Rs. 7.80 crores on the basis of TPO's order which is bad in law as the jurisdictional conditions have not been satisfied. 1.10 The ld. Authorities below erred in not appreciating that the transaction in question is not an international transaction, as Explanation (C) with retrospective effect from 01.04.02 can have effect only from Assessment Year 2013-14 and thereby erred in making an upward adjustment of Rs. 7.80 crores. 1.11 On the facts and in the circumstances of the case and in law, th....
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....had filed their respective exhaustive written submissions. Ld. AR has precisely raised all the grounds thereby challenging the validity of the impugned order by raising the following grounds:- I.There is no income arising from an international transaction II.Income which could have, but was not earned is not chargeable to tax. III.Chapter X is not a charging provision, it is a machinery provision. IV. There is no international transaction for a price. V. There is lack of Jurisdiction. VI. The satisfaction of the CIT for granting approval for the reference to the TPO not having been produced is bad in law. In the alternative it is mechanical and bad in law for that reason. VII. Explanation (i)(c) to section 92B of the Act does not apply to the transaction of advancing of share application money by the appellant. VIII. The recharacterisation of Share Application Money as a loan is bad in law. IX. The Computation mechanism fails as no price exists. X. A Secondary Adjustment cannot he made in the absence of a statutory provisio. Although, the assessee has raised many grounds of appeal but since....
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....n and accordingly, provisions of section 92B are not applicable to the said remittance and in the absence of any income from the transaction, transfer pricing provisions are not applicable." 10.1 Ld. AR further submitted that during the course of assessment, reference was made by AO u/s. 92CA(1) to Addl. Commissioner of Income Tax [CIT] - Transfer Pricing Officer (TPO) on 17.03.2015. The assessee vide its letter dated 13.06.2017 has requested the AO to provide the copy of reference made to Transfer Pricing Officer [TPO] u/s 92CA(1), satisfaction recorded by AO and approval of CIT for making said reference, especially when the assessee had objected to consider the transaction as International Transaction. As per learned AR, while providing the documents, the Id. AO has categorically specified in his letter dated 13.06.2017, that there is no requirement of recording separate satisfaction of AO where the value of international transactions is more than Rs. 15 crores. The relevant extract of AO's letter was as under: "5. As regards your query regarding whether satisfaction for making reference has been recorded, as per the CBDT circular in force, all the cases -wherein the....
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.... 11.2 The Ld. DR further submitted that in the course of transfer pricing proceedings the TPO asked the assessee to state whether any shares have been allotted against the above mentioned sums remitted to the AE. On the basis of assessee's reply the TPO found that: i. The entire amount had been refunded by the AE on 05.03.14. No part of the above remittances was converted into share capital. ii. During the previous year the assessee has not earned any income whereas it has incurred finance cost to the extent of Rs. 1.31 crores. iii. The assessee failed to submit the financial statement of the AE for the relevant period even though as the holding company the assessee undoubtedly had access to the same. iv. The assessee also failed to produce any resolution passed by the AE calling for the share application money and justification for non- allotment of shares against the same. 11.3 It was submitted by Ld. DR that in the background of these facts, the TPO concluded that the impugned transaction was actually a loan transaction and accordingly imputed interest on the same. As the amounts were advanced in US$, the TPO applied Libor+262.50 BPS. ....
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....e was provided by the Id. AO vide letter dated 13.06.2017 following documents: (i) The copy of reference made to TPO dated 17.03.2015 (ii) The copy of letter by the office of CIT dated 16.03.2015 conveying the approval of CIT. 12.2 However, while providing the documents, the Id. AO has categorically specified in his letter dated 13.06.2017, that there is no requirement of recording separate satisfaction of AO where the value of international transactions is more than Rs. 15 crores. The relevant extract of AO's letter is reproduced below: "3. As regards your query regarding whether satisfaction for making reference has been recorded, as per the CBDT circular in force, all the cases -wherein the value of international transactions is more than Rs. 15 crores were required to be referred to the TPO for determination of Arm's Length Price and no separate satisfaction was required to be recorded by the A. O, which may please be noted" 12.3 This is also evident from the letter of reference u/s 92CA(1) of the Act made to the Addl.CIT (TPO)- 4(3) wherein he has simply quoted the provisions of the Section 92CA which reads as under: "3. I cons....
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....putation of the ALP to the TPO. Firstly, the AO "consider it necessary and expedient so to do" and secondly the AO will necessarily have to given opportunity to the assessee after receiving the report of the TPO and before he finalizes the assessment, computing the total income. The AO was not bound to accept the ALP as determined by the TPO, because as per section 92CA(4) before amendment the AO was to proceed to compute the total income of the assessee having regard to the ALP determined by the TPO. And in this way, assessee would get a hearing after the TPO passed the order and the AO was empowered to reject the TPO's findings on hearing the assessee and grant relief. But this premise is no longer valid After the amendment to section 92CA(4) which now reads as under:- "('4) On receipt of the order under sub-sec/ion ('3), the Assessing Officer shall proceed to compute the total income of the assessee under sub-section (4of section 92C in conformity with the arm's length price as so determined by the Transfer Pricing Officer. Thus in this way, prior to the amendment, the AO was obliged to give an opportunity of being heard to the assessee after the re....
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....ations of Hon'ble Bombay High Court are at para 32-41, which read as under: "32. it is clear that in view of Section 92(1), there must be income arisingand/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 Chapter X on the ground that no income arises and/or is affected or potentially arises and/or is affected on account of issue of its shares to its holding company, The Assessing Officer does not deal with this objection/issue before referring the matter to the TPO. The TPO does not deal with the above objection on the ground that in terms of Section 92CA his mandate is only to compute the ALP in relation to the International Transaction. The TPO in the impugn....
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....2CA(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 matter to the TPO. The exercise of finding out whether any income arises and/or is affected or potentially arises and1or 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 then the requirement for taking a decision after taking on board the objection becomes necessary. In the absence of it being considered at this stage, the same could only be considered by the DRP and as pointed out above, if considered at the very threshold by the Assessing Officer it could save an elaborate exercise of determining the ALP which may turn out to be entirely academic. It is for the above reason that grant of per....
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....ection is raised about the applicability of chapter X by an assessee then the requirement for taking a decision after taking on board the objection becomes necessary. Admittedly the aforesaid exercise of considering the objection of no income arising or potentially arising from the transaction has been done by AO in this case before making reference to the TPO and also finds no mention even in the draft assessment order. This in our view is a jurisdictional issue. In this connection, the judgement of Sony India Private Ltd. vs. CBD.T & Anothet288 ITR 52, that held that no such hearing was required is instructive. In that case the Delhi High Court was considering the position of law as it stood before 01.06.2007. Section 92CA(4) before its substitution w.e.f 01.06.2007 read as follows: "(4) On receipt of the order under sub-section (3), the Assessing Officer shall proceed to compute the total income of the assessee under sub-section (4) of section 92C having regard to the arm's length price determined under sub-section (3) by the Transfer Pricing Officer. " It held in Para 21 as follows: "Two aspects require to be taken note of in this context. T....
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....an opportunity of being heard to the assessee after receipt of order of TPO. Thus, assessee could avail of the opportunity to convince the AO that ALP was not the price determined by the TPO. However, after the amendment, the AO has no choice but to pass the order in conformity with the order of TPO. Thus if the Revenue is right in its contention that no hearing is required to be given before referring the matter to the TPO the assessee is deprived of opportunity of being heard both before the reference is made to the TPO as well as after the TPO makes his report. This is an absurdity. Any interpretation that leads to an absurdity should be eschewed. Therefore, as the law stands today the opportunity of a hearing must be made before the reference is made to the TPO. We are also of the view that violation of jurisdictional issue cannot be cured even by the consent of the affected parties. The case of violation of natural justice constitutes an „irregularity‟ and a case of violation of jurisdictional issue makes proceedings „void‟. Our this view stands fortified and gets strengthened by the judgment of Hon'ble Supreme Court in case of Deepak Agro vs. State ....