TaxTMI 
TaxTMI 
2018 (2) TMI 1914
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....nd trading of telecom equipment and other related services. For the Asstt. Year 2005-06 they have filed the return of income on 28.10.2005 declaring a total income of Rs. 16,69,52,320/-. During scrutiny the case of the assessee was referred to the Transfer Pricing Officer for determination of arm's length price of the following international transactions entered into by the assessee with its associated enterprises: Sl No Description of the transaction Amount 1. Purchase of raw material, components etc. Rs. 169,29,14,019/- 2. Purchase of fixed assets Rs. 7,00,02,668/- 3. Payment of royalty Rs. 1,53,52,556/- 4. Purchase of software Rs. 49,45,506/- 5. Software services Rs. 95,29,11,539/- 6. Commissioner received Rs. 26,86,64,303/- 7. Communication charges paid Rs. 3,41,97,344/- 8. Fes for technical services Rs. 74,80,327/- 9. Payment of training charges Rs. 3,05,710/- 10. Recovery of expenses Rs. 15,63,21,483/- 11. Payment of miscellaneous and other Administrative expenses Rs. 43,43,806/- 3. Learned TPO accepted the international transactions of the assessee in all segments e....
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....mmissioner of Income-tax, Circle 12(2) Bangalore (Learned AO), the order dated 31 October, 2008 passed by Joint Director of Income Tax, Transfer Pricing-II, Bangalore (Learned TPO) and pursuant to which order passed by Commissioner of Income Tax (Appeals) - XX, New Delhi (CIT(A)), is bad in law and void ab-initio. 2. That on facts and circumstances of the case and in law, the Learned AO have grossly erred in making assessment under section 143(3) read with sections 144C(4) of the Income tax Act, 1961 ("the Act") since: (i) the reference under section 92CA(1) made by Learned AO on 11 July, 2006 (refer page 1 of the order u/s 92CA of the Act enclosed as Annexure 1) to the Learned TPO was an invalid reference as the same was made before the initiation of the assessment proceedings under section 143(2) of the Act as the notice under section 143(2) of the Act was issued to the Appellant on 4 September, 2006 (refer page 1 of assessment order enclosed as Annexure 2); and (ii) henceforth, the adjustment made by the Learned AO is not in consequence of an order passed under section 92CA(3) which ought to have been passed by the TPO on the basis of a valid reference....
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....imize Learning (P) Ltd. vs ACIT (2015)54 Taxmann.com 234 wherein, according to the Ld. AR, an identical question was considered by the Pune Bench with the following observations: "..... Sections 92 to 92F of the Act were introduced by the Finance Act, 2001 and are effective from the assessment year 2002-03. Section 92(1) of the Act provides that any income arising from an international transaction between associated enterprises shall be computed having regard to the arm's length price. Sections 92A and 92B of the Act contain provisions relating to the meaning of the expressions "associated enterprise" and "international transaction" respectively. Section 92C of the Act contains the powers of the Assessing Officer and the manner of determination of arm's length price in relation to an international transaction. Section 92CA of the Act provides that where the Assessing Officer considers it necessary or expedient to do so, he may refer to the Transfer Pricing Officer the determination of the arm's length price. Section 92CB of the Act relates to the power of the Board to make safe harbour rules. Section 92D of the Act relates to Maintenance and keeping of informat....
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....tion (3) of section 92CA but the computation of total income having regard to the arm's length price so determined by the TPO is required to be done by the Assessing Officer under subsection (4) of section 92C, read with sub-section (4) of section 92CA. 14. In sum and substance, the scheme of the Act postulates that arm's length price in relation to an international transaction is determined either by the Assessing Officer as provided in sub-section (3) of section 92C or by the TPO u/s 92CA(3) of the Act where a reference is made to him by the Assessing Officer. In both situations, the Assessing Officer is required to compute the total income of the assessee having regard to the arm's length price of the international transaction so determined, either in terms of sub-section (4) of section 92C or subsection (4) of section 92CA. Notably, sub-section (4) of section 92C comes into play where an arm's length price in relation to the international transaction is determined by the Assessing Officer and sub-section (4) of section 92CA comes into play where the arm's length price in relation to an international transaction is determined by the TPO, on a referen....
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....action with an associated enterprise or there are transactions with more than one associated enterprises the aggregate value of which exceeds Rs. 5 crores, the transactions should be referred to the TPO. Before making reference to the TPO, the Assessing Officer has to seek approval of the Commissioner/Director as contemplated under the Act. Under the provisions of section 92CA reference is in relation to the international transaction. Hence all transactions have to be explicitly mentioned in the letter of reference. Since the case will be selected for scrutiny before making reference to the TPO, the Assessing Officer may proceed to examine other aspects of the case during pendency of assessment proceedings but await the report of the TPO on the value of international transaction before making final assessment." [underlined for Emphasis by us] 17. It is emphasized on the basis of the CBDT Instruction (supra) that even as per the understanding of the CBDT, a case is to be selected for scrutiny assessment before the Assessing Officer may refer the computation of arm's length price in relation to an international transaction to the TPO u/s 92CA of the Act. Therefore, we ar....
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....he reference of the matter of the TPO, therefore, the stipulated period laid down by the CBDT does not pre-suppose that the issue of notice u/s 143(2) of the Act has to be necessarily and without fail precede the reference to TPO. 19. We have carefully considered the plea of the Ld. CIT-DR, that it is open to the Department to make a reference to the TPO without issuing notice u/s 143(2) of the Act, but in our view, it is not supported by a schematic reading of the relevant Provisions relating to the transfer pricing assessment contained in sections 92 to 92F. The entire purpose of computation of arm's length price in relation to an international transaction is found in sub-section (1) of section 92 of the Act. Section 92(1) mandates that any income arising from an international transaction shall be computed having regard to the arm's length price. Therefore, the sole aim of computing the arm's length price in relation to any international transaction is to compute the income arising therefrom. Thus, the computation of income and the determination of arm's length price in relation to the international transaction have to go hand-in-hand and without there be....
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....ter to the TPO under approval of the Commissioner. If both the conditions are satisfied there is no bar or requirement of any assessment proceedings being pending, before the reference is made to the TPO. 22. The aforesaid plea of the Ld. CIT-DR also, in our view, fails to take into consideration the entire scheme envisaged for the transfer pricing assessment in sections 92 to 92F of the Act. The provisions of sections 92 to 92F of the relate to computation of income from the international transaction having regard to the arm's length price, meaning of associated enterprises, meaning of international transaction, determination of arm's length price, keeping and maintaining of information and documents by persons entering into international transactions, furnishing of a report from an accountant by persons entering into such transaction and the definition of certain expressions occurring in such sections. The aforesaid provisions do not operate in individual spheres but the same operate with a singular purpose of computing income arising from an international transaction. The process of computation of income is necessarily a part and parcel of the assessment proceed....
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....urt of Karnataka held that on the day the reference was made by the Assessing Officer to the Transfer Pricing Authority, there was no return, in respect of which a notice u/s 143(2) of the Act can be issued, pending for consideration by him, and therefore, the very reference was bad. The question was not - whether any notice under section 143(2) was issued or not. It was only whether the return, in respect of which such notice can be issued, was pending or not. 13. This decision of Karnataka High Court was referred by a coordinate bench of this Tribunal in XL India Business Services P. Ltd. (supra) wherein the reference to the Transfer Pricing Officer was made after the end of the time limit available for issuance of notice u/s 143(2) and before the commencement of re-assessment proceedings. In this context the Tribunal referred to the decision of the Hon'ble Karnataka High Court in SAP Labs (p) Ltd. (supra) and observed that inasmuch as no income-tax return in respect of which a notice u/s 143(2) can be issued was not pending and the time for issuance of such notice had come to an end before the point of time when a reference was made, such a reference itself was legally invali....
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.... barred by limitation. 17. We are, therefore, clear in our mind that the ratio of all these decisions is that unless an income-tax return, in respect of which notice u/s 143(2) of the Act can be issued, was pending before the AO, no reference could be made by the AO to the TPO. The irresistible conclusion, therefore, is that it is not the requirement of law that notice u/s 143(2) of the Act shall precede the making of reference, but what the law requires is that a return of income tax in respect of which notice u/s 143(2) of the Act could be issued, must be pending as on the date of reference to the Ld. TPO. As a matter of law, Section 92CA does not speak of necessity of any issuance of notice u/s 143(2) as on the date of making reference. Judicial pronouncements make it amply clear that it is suffice if return of income is pending and time is available to the AO to issue notice u/s 143(2). When once this the duel requirement is complied with, whether or not the notice u/s 143(2) of the Act is issued before the reference u/s 92CA(1) of the Act, is irrelevant and it does not vitiate the reference or the consequential proceedings on such a ground. 18. Next contention of the Ld.....
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....f that section has not been made before such date; or (ii) is made on or after the 1st day of June, 2007, the provisions of clause (a) shall, notwithstanding anything contained in the first proviso, have effect as if for the words "two years", the words "thirty-three months" had been substituted.] [emphasis supplied by us] 20. In the preceding paragraphs we held that a reference under section 92CA (1) could validly be made by the Ld. AO to the Ld. TPO if the income tax return in respect of which notice u/s 143(2) of the Act could be issued, is pending before the Ld. AO as on the date of such reference. We are of the considered opinion that making reference under section 92 CA (1) and issuing notice under section 143(2) are integral part of the exercise to assess the total income of the assessee. That being so, we find it difficult to assume that making reference under section 92CA(1) of the Act earlier to the issuance of notice under section 143(2) of the Act would make any difference in the nature of process of assessment of total income of the assessee. When law permits a reference for determination of ALP to the Ld TPO before actual issuance of notice under sectio....
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....cription of these companies in tabular form, learned TPO observed that the taxpayer also deals with transmission, switching, satellite communication, Network products (Access and Data), Telecom Power Plant/Battery, EPBT, EPBAX, Smart cards, call charge indicators, Caller ID and ID phones and other office products. It is, therefore, clear that functional similarity of the assessee with all comparables selected is not in dispute. 26. Out of these five companies, learned TPO accepted Shyam Telecoms as a good comparable and rejected four others. As recorded by the Learned TPO, the main reason as to why the four companies should not be compared as comparables is that these companies are incurring continuous losses for facing decline revenues for the last three years. In respect of ITI Ltd. and Himachal Futuristic Communications Ltd., the learned TPO recorded that these two companies are facing continuous losses for the last three years whereas Punjab Communications Ltd. is suffering declining revenues for the last three years. In respect of HTL Ltd., it is stated that the company was referred to BIFR to declare it as a sick company. Out of these four companies rejected by the learned....
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.... authorities below are justified in rejecting these three companies and there is no reason now for considering all these companies in the set of comparables. The learned DR placed reliance Yum Restaurants, TS 253-ITAT-2011 (DEL) TP); Navisite India (TS-408-ITAT-2014(DEL) TP); and Aithent Technologies Ltd. (TS-760-ITAT-29\016 (Del) TP) in support of her contentions. 29. A reading of the financials of these companies with reference to the annual reports corroborates the statement of learned AR that either loss making or the decline in revenues is the trend in the industry. In Chryscapitals Investments Advisors (I) P.LLtd. (supra) vide para 44, the Hon'ble jurisdictional High Court held that,- 44. In light of the above findings, this Court concludes as follows: a. The mere fact that an entity makes high/extremely high profits/losses does not, ipso facto, lead to its exclusion from the list of comparables for the purposes of determination of ALP. In such circumstances, an enquiry under Rule 10B(3) ought to be carried out, to determine as to whether the material differences between the assessee and the said entity can be eliminated. Unless such differences cannot be....
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....character of expenses from revenue to capital. 33. Per contra, it is the argument of the learned AR that the learned CIT(A) relied upon the decision of the Mumbai Bench in the case of Sulzer India Ltd. vs JCIT (2010), 134 TTJ 385 to reach the conclusion that the waiver of secured loan being capital or non trading in nature, cannot be considered as remission of trading liability to tax u/s 41(1)(a) of the Act. He submitted that this decision in the case of Sulzer India Ltd. (supra) was upheld by the Hon'ble High Court in the decision reported in CIT vs. Sulzer India Ltd., 369 ITR 717. His further submission is that this issue was considered by the Tribunal in favour of the assessee for the Asstt. Years 2004-05 and 2007-08. 34. As could be seen from the order of the leaned CIT(A) vide para 3.4, learned CIT(A) while placing reliance on Sulzer India Ltd., the facts of which are similar to the case on hand, held that the subsequent waiver of the secured loan being capital or non trading in nature cannot be considered as remission of trading liability to tax u/s 41(1)(a) and on that premise, he deleted the same. Further, in assessee's own case in the asstt.2004-05 decided on 30.6.2....