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Judgment
The Court : The assessee is in appeal from an order dated December 8, 2016 passed on the assessee's petition under Article 226 of the Constitution questioning the propriety of the assessing officer referring a matter for computation of the arm's length price to the Transfer Pricing Officer (TPO) without giving any opportunity to the assessee to explain whether there was any international transaction or such transaction was with an associated enterprise that required an arm's length price to be determined. The matter pertains to the provisions relating to the avoidance of tax under Chapter-X of the Income Tax Act, 1961 and the computation of income from "international transactions" as defined in such Chapter.
There is a circular issued by the Central Board of Direct Taxes (CBDT) in the form of Instruction no.3/2016 dated March 10, 2016. The circular covers matters pertaining to the reference by an assessing officer to a Transfer Pricing Officer. Clause 3.4 of the relevant circular or instruction envisages a situation where a taxpayer has not declared one or more international transactions or specified domestic transactions in the accountant's report under Section 92E of the Act and such international transactions or specified domestic transactions come to the notice of the assessing officer. The said instruction of March, 2016 advises assessing officers in such a situation to provide an opportunity of being heard to the taxpayer before the assessing officer records his satisfaction or otherwise as to the existence of such transaction. In case no objection is raised by the taxpayer as to the applicability of Chapter-X of the Act, the assessing officer is advised to refer the transaction to the TPO for determining the arm's length price after obtaining the approval of the Principal Commissioner of Income Tax (PCIT) or Commissioner of Income Tax (CIT). However, as per the said instruction of March, 2016, where the applicability of Chapter-X to a situation is objected to by the taxpayer "the AO must consider the taxpayer's objection and pass a speaking order so as to comply with the principles of natural justice." If the assessing officer, however, decides that the transaction in question needs to be referred to the TPO, a reference may be made after obtaining the approval of the PCIT or CIT.
The writ petitioners have relied on the correspondence exchanged between the assessing officer and the assessee pertaining to the assessment for assessment year 2011-12. According to the writ petitioners, there was no reference to any transaction which could be regarded as an international transaction within the meaning of the definition in Chapter-X of the Act and, as such, no question arose of the assessing officer making any reference to the TPO for determination of any arm' s length price before the assessee had been put on notice as to any international transaction or specified domestic transaction and the assessee had an opportunity of dealing with the suspicion harboured in such regard by the assessing officer. Indeed, the case made out by the writ petitioners was that the inquiries into the entries pertaining to the return filed by the assessee for assessment year 2011-12 were made so late in March, 2014 that the assessing officer forwarded a written communication on April 4, 2014 informing the assessee that the assessee's representative had been told telephonically on March 31, 2014 that the permission of the relevant commissioner had been obtained before the matter was referred to the TPO for assessment of the arm's length price. The writ petitioners try to make out a case that the assessing officer ran out of time, could not complete the assessment or form an opinion within the period of limitation and referred the matter to the TPO merely to earn the benefit of a further year to complete the assessment.
By the judgment and order impugned, the Single Bench found that the questions that had been raised in the writ petition were mixed questions of law and fact which were required to be gone into before it could be said that there was an international transaction or specified domestic transaction that had been suppressed or concealed by the assessee. Upon taking a view that all aspects of the matter had to be inquired into, the Single Bench referred the matter, lock, stock, and barrel, so to say, to the TPO.
The principal contention of the writ petitioner-appellants here is that the order impugned is not in conformity with the CBDT instruction of March, 2016 and, in any event, the TPO has no authority under the scheme of Chapter-X of the said Act to look into any aspect other than determining the arm's length price in respect of an international transaction or specified domestic transaction.
In support of the appellants' contentions, a Single Bench judgment of this Court reported at 339 ITR 302 is first referred to where, after considering the said circular or instruction of March, 2016, the Court came to an opinion that an opportunity had to be afforded to the assessee to contest a view that the assessing officer may take as to the existence of an international transaction or specified domestic transaction within the meaning of the relevant expressions in Chapter-X of the said Act, before a reference could be made by the assessing officer to the TPO. Similar views have been taken by the Gujarat High Court and the Delhi High Court in the judgments reported, respectively, at (2016) 291 CTR 309 and at 386 ITR 665.
The department contests the appeal and says that the TPO has due authority to consider all aspects of the matter even upon a reference being made by an assessing officer to determine the arm's length price. The department submits that the order impugned cannot be flawed in such regard and such order is best left untouched since the assessee would get a further chance to question the prima facie opinion formed by the assessing officer as to the international transaction after the TPO determines the arm's length price and before the assessing officer makes the final assessment.
In support of the second part of its contention, the department refers to a judgment reported at 288 ITR 52 and paragraph 19 of the report that speaks of the assessing officer only forming a prima facie opinion at the time of making a reference to the TPO.
The Delhi judgment reported at 288 ITR 52 does not appear to be good law any longer in view of the CBDT instruction of March, 2016 that specifically instructs assessing officers to follow a particular course of action. Such circular unambiguously calls for an opportunity to be afforded to the assessee before an opinion is formed by the assessing officer as to whether the provisions of Chapter-X would be attracted to a particular return or any situation. It is only after affording the assessee an opportunity to be heard and considering the views of the assessee may the assessing officer make a reference to the TPO for the determination of the arm's length price upon obtaining the approval of the PCIT or CIT.
In the light of such CBDT instruction of March, 2016 and since nothing in Chapter-X of the said Act clothes the TPO with any authority to determine anything other than the arm's length price pertaining to an international transaction or a specified domestic transaction, the order impugned, to the extent that it requires the TPO to inquire into the other aspects of the matter, particularly as to the existence of an international transaction, cannot be accepted.
Accordingly, APO No. 36 of 2017 is allowed by modifying the judgment and order impugned dated December 8, 2016 and by remitting the matter to the assessing officer for the assessing officer to afford the assessee an opportunity of being heard if the assessing officer is of the view that there was an international transaction or a specified domestic transaction that was suppressed or concealed in the return for the relevant assessment year submitted by the assessee. Upon considering the assessee's objection, if any, in such regard, if the assessing officer is of the opinion that there was, indeed, an international transaction or a specified domestic transaction within the meaning of the relevant expressions in Chapter-X of the Act in course of the relevant assessment year, the assessing officer may refer the matter to the appropriate TPO upon obtaining the previous consent of the Commissioner or Principal Commissioner.
It is recorded that the writ petitioners have fairly submitted that the ground of limitation will not be urged by the writ petitioners while the assessing officer embarks on the exercise of ascertaining the facts in accordance with the directions contained in the order impugned as modified herein.
There will be no order as to costs.