Mehsana District Co-operative Vs. DCIT (Gujarat High Court)
Subrule (7) of rule 10THD thus lays down the time limit for the Assessing Officer to pass an order under subrule(4) and for the concerned competent authority to pass an appropriate order under subrule(6). We may recall under subrule(4), the Assessing Officer may declare that the option exercised by the assessee for safe harbour was invalid. Under subrule(6), the concerned authority would dispose of the assessee’s objection to any such order that the Assessing Officer may have passed under subrule(4). The rules do not rest at merely laying down such time limit. Subrule(8) in fact, mandates that if either the Assessing Officer or the concerned competent authority does not pass the order within the time specified in subrule(7), then the option for safe harbour exercised by the assessee shall be treated as valid. Subrule(8) thus gives rise to a deeming fiction where in absence of any order passed by the Assessing Officer under subrule(4) declaring the option exercised by an assessee as invalid, same shall be treated as valid. In fact, even if the Assessing Officer has passed such an order under subrule(4) and the assessee objected to such order before the concerned authority within the time permitted and such authority fails to dispose of such objection within the time specified in clause(ii) of subrule(7) of Rule 10THD, in such a case, the option exercised by the assessee shall be treated as valid.
In the present case, admittedly, after the petitioner exercised such an option, the Assessing Officer passed no order under subrule(4) of rule 10THD declaring that the exercising of option was invalid. In terms of subrule(7) and subrule(8) of the said rule, therefore, the option exercised by the assessee would be treated as valid.
Once this conclusion is reached, it follows as a natural and necessary corollary that the Transfer Pricing regime would not apply. That being the case, the Assessing Officer had no authority to make any reference to the TPO to ascertain the arm’s length price of the petitioner’s specified domestic transactions. Reference itself was therefore, invalid. CBDT’s circular dated 10.3.2006 could not have and does not lay down anything to the contrary. The circular merely prescribes the circumstances under which the Assessing Officer would make reference to the TPO. Nowhere does the circular provide that as soon as such circumstances exist, the Assessing Officer would make a reference to the TPO, irrespective of the fact that the assessee had opted for safe harbour and such option was treated or deemed to be treated as validly exercised. Legally speaking, CBDT could not have given any such directive. Eventually no such directive can be discerned from the circular.
FULL TEXT OF THE HIGH COURT JUDGMENT / ORDER IS AS FOLLOWS:-
1. The petitioner has challenged a reference made by respondent no.1 Deputy Commissioner of Income Tax to respondent no.2 Transfer Pricing Officer (“TPO” for short) in case of the petitioner and consequential order dated 15.9.2017 passed by the TPO in which he made no upward adjustment on the “specified domestic transactions” of the petitioner.
2. Brief facts are as under. The petitioner is a District level Cooperative Milk Producers’ Union and is engaged in collection and processing of milk from the member societies who in turn would be cooperative milk societies at Village and Taluka levels. For the assessment year 2014¬2015, the petitioner filed return of income on 29.9.2015. Since the petitioner had entered into certain specified domestic transactions and was desirous of opting for safe harbour, the petitioner applied for such purpose in a prescribed format duly certified by the Chartered Accountant. Such application was filed along with the return itself.
3. Case of the petitioner is and to which no dispute is raised by the Revenue that the Assessing Officer did not raise any objection to the petitioner’s application for safe harbour nor passed any order declaring that the petitioner had not validly opted for safe harbour.
4. The return of income filed by the petitioner was taken in scrutiny by the Assessing Officer. He issued a notice under section 143(2) of the Income Tax Act(“the Act” for short) on 28.8.2015. In the course of such scrutiny assessment, the petitioner received various notices from the Assessing Officer and replied to the same. As per the normal assessment procedure, the last date for completing the assessment in case of the petitioner for the said assessment year 2014¬2015 would be 31.12.2016.
5. On 8.12.2016, the petitioner wrote to the Assessing Officer and preempted any attempt on his part of making reference to the TPO. The petitioner referred to CBDT instructions no.3/2016 dated 10.3.2016 and contended that the case of the petitioner does not fall in any other criteria for making reference. The petitioner conveyed that despite this, if the Assessing Officer was inclined to make such a reference, the petitioner’s objections may be called for before making any reference in this regard.
6. On 13.12.2016, without informing the petitioner, respondent no.1 Assessing Officer of the petitioner made reference to the TPO of the petitioner’s specified domestic transactions to ascertain the arm’s length price.
7. On 29.12.2016, the petitioner wrote to the Principal Commissioner of Incometax and pointed out that the petitioner had made an application dated 8.12.2016 to the Assessing Officer in connection with Domestic Transfer Pricing and further that the petitioner had opted for safe harbour. The petitioner requested the Principal Commissioner to do the needful in the matter.
8. On 20.2.2017, the TPO issued the notice to the petitioner asking the petitioner to produce evidence in support of computation of arm’s length price in relation to the petitioner’s specified domestic transactions. This should be done latest by 7.3.2017.
9. On 7.4.2017, the petitioner wrote to the TPO and pointed out that the petitioner had opted for safe harbour, a copy of application filed by the petitioner for such purpose under the prescribed form was attached and requested the TPO to take the same into account.
10. On 19.6.2017, the TPO once again wrote to the petitioner asking the petitioner to provide necessary information latest by 10.7.2017 for computation of arm’s length price. Eventually, TPO passed the impugned order dated 15.9.2017 making no adjustments for the arm’s length price of the petitioner’s specified domestic transactions.
11. Case of the petitioner is that the action of respondent Assessing Officer of referring the petitioner’s case to the TPO itself was wholly illegal and invalid when the petitioner had applied for safe harbour and when such application was deemed to have been accepted in terms of the relevant rules. The petitioner’s further contention is that the Assessing Officer had made such a reference merely to ensure extended period of limitation for completing the assessment. Our attention was drawn to the sequence of events noted above. It was pointed out that at the fag end of the period for framing the assessment, the Assessing Officer had made the reference to the TPO on 13.12.2016 totally unknown to the petitioner. This was despite the petitioner’s objection to any such reference raised in the petitioner’s letter dated 8.12.2016. Under the circumstances, according to the petitioner, even when the TPO has not suggested any upward adjustment in price of the petitioner’s specified domestic transactions, the order of the TPO is required to be quashed, failing which, the Assessing Officer could claim extended limitation for completing the assessment which has otherwise become timebarred.
12. On the other hand, learned counsel for the department opposed the petition contending that the Assessing Officer had acted on the CBDT circular no.3/2016 dated 10.3.2016 under which the Assessing Officer was required to make reference to the TPO under certain circumstances. Since the petitioner’s case was covered by the said circular, reference was made. Counsel further submitted that the TPO has not made any upward adjustment of the price of the petitioner’s specified domestic transactions. The order passed by the TPO not being adverse to the petitioner need not be quashed.
13. Short question, in the present case is whether the reference made by the Assessing Officer to the TPO of the petitioner’s specified domestic transactions was valid?
14. In order to decide this question, we may refer to relevant statutory provisions. Section 92C of the Act pertains to computation of arm’s length price. By amendment made in the Finance Act 2012, with effect from 1.4.2013, under section 92C, transfer pricing mechanism would apply also in relation to certain specified domestic transactions. Section 92CA of the Act refers to reference to Transfer Pricing Officer. In terms of subsection(1) of section 92C, where any person, being an assessee, who has entered into an international transaction or specified domestic transaction in any previous year and the Assessing Officer considers it necessary or expedient to do so, he could with the previous approval of the Principal Commissioner or Commissioner, refer the computation of the arm’s length price in relation to such international transaction or specified domestic transaction to the Transfer Pricing Officer and thereupon rest of the provisions contained in the said section will apply.
15. As can be gathered from CBDT circular no. 5/2010 dated 3.6.2010 in order to reduce the number of transfer pricing audits and prolonged disputes, since number of cases identified for audit and the transfer pricing adjustments which were locked up in disputes have increased, section 92CB was inserted to the Act to provide for safe harbour rules.
16. Section 92CB which pertains to power of Board to make safe harbour rules reads as under :
“92CB (1) The determination of arm’s length price under section 92C or section 92CA shall be subject to safe harbour rules.
(2) The Board may for the purposes of subsection(1), make rules for safe harbour.
Explanation For the purposes of this section “safe harbour” means circumstances in which the income tax authorities shall accept the transfer price declared by the assessee.”
17. In terms of section 92CA, Part DC to Chapter II to the Income Tax Rules, 1962 (“the said Rules” for short) pertaining to Safe Harbour Rules for specified domestic transactions was inserted by Income Tax (Second Amendment) Rules, 2015 with effect from 4.2.2015. Rule 10THA of the said Rules, specifies an ‘eligible assessee’ as under :
“10THA The “eligible assessee” means a person who has exercised a valid option for application of safe harbour rules in accordance with the provisions of rule 10THC, and
(i) is a Government company engaged in the business of generation, supply, transmission or distribution of electricity; or
(ii) is a co¬operative society engaged in the business of procuring and marketing milk and milk products.”
18. Rule 10THB pertains to eligible specified domestic transaction and reads as under :
“10THB The “eligible specified domestic transaction” means a specified domestic transaction undertaken by an eligible assessee and which comprises of :
(i) supply of electricity; or
(ii) transmission of electricity; or
(iii) wheeling of electricity; or
(iv) purchase of milk or milk products by a co-operative society from its members.”
19. Rule 10THC pertains to safe harbour and reads as under :
10THC (1) Where an eligible assessee has entered into an eligible specified domestic transaction in any previous years relevant to an assessment year and the option exercised by the said assessee is treated to be validly exercised under rule 10THD, the transfer price declared by the assessee in respect of such transaction for that assessment year shall be accepted by the incometax authorities, if it is in accordance with the circumstances as specified in subrule(2).
(2) The circumstances referred to in subrule(1) in respect of the eligible specified domestic transaction specified in column(2) of the Table below shall be as specified in the corresponding entry in column (3) of the said Table:
