Sec. 92CA(1) envisages that where the assessing officer considers it ‘necessary or expedient’ to do so, he may with the approval of the Commissioner refer the computation of the arm’s length price in relation to the concerned international transaction to the TPO. In my opinion, the said section does not contemplate that the assessing officer has to first come to a definite finding that there is an international transaction within the meaning of Sec. 92B before he can exercise his power to refer the matter to the TPO. So long as he is of a prima facie view that an international transaction is involved and it is necessary or expedient to refer the computation of the arm’s length price in relation thereto to the TPO, he will be well within his powers to do so.
AO can refer a case to TPO if he is of a prima facie view that an international transaction is involved
Relevant Extract from the Judgment
(38) Although arguments have been advanced at length on behalf of the parties, the issue involved in the present proceeding is a short one, i.e. whether the reference made by the respondent no. 3 to the TPO under Sec. 92CA(1) of the IT Act in respect of the petitioner companies is without jurisdiction or otherwise incompetent so as to warrant judicial intervention.
(39) The sum and substance of the argument made by learned Senior Counsel for the petitioners is that the reference is without jurisdiction because: (i) a reference under Sec. 92CA can be made to the TPO only if there is an international transaction; (ii) for this purpose an ‘international transaction’ means a transaction between two or more associated enterprises; (iii) PWH and Services BV are not associated enterprises. Hence, PWH and Services BV are not involved in any international transaction for the purpose of Sec. 92CA(1) of the Act.
(40) Mr. Pal, learned Senior Counsel, laid great emphasis on the Memorandum to the Finance Bill, 2002 and in particular the portion that has been extracted above, in support of his submission that Sec. 92A (1) cannot be read independently of Sec. 92A(2). In other words, according to him, mere participation by one enterprise in the management or control or capital of another enterprise would not make them associated enterprises unless and until at least one of the situations contemplated in sub-Secs. (a) to (m) of Sec. 92A (2) exists. Mr. Pal took pains to go through each of the said sub-Sections and submitted that none of those conditions are satisfied. Hence, the pre-condition for making a reference under Sec. 92CA(1) is absent, rendering the reference in the present case incompetent and without jurisdiction.
(41) Even if I were to accept the interpretation of Learned Senior Counsel given to Sec. 92A of the Act, I am unable to hold that the reference to the TPO is without jurisdiction. Sec. 92CA(1) envisages that where the assessing officer considers it ‘necessary or expedient’ to do so, he may with the approval of the Commissioner refer the computation of the arm’s length price in relation to the concerned international transaction to the TPO. In my opinion, the said section does not contemplate that the assessing officer has to first come to a definite finding that there is an international transaction within the meaning of Sec. 92B before he can exercise his power to refer the matter to the TPO. So long as he is of a prima facie view that an international transaction is involved and it is necessary or expedient to refer the computation of the arm’s length price in relation thereto to the TPO, he will be well within his powers to do so. It is needless to say that the proceeding before the TPO will be only upon notice to the assessee who will have full opportunity of urging before the TPO that no international transaction is involved. In the present case, PWH shall have full opportunity of impressing upon the TPO that it and Services BV are not associated enterprises. Whether or not Services BV participates directly or indirectly in the management or control or capital of PWH and whether or not at least one of the conditions mentioned in the sub-paragraphs (a) to (m) of Sec. 92A(2) of the Act is satisfied, are factual issues which the TPO is equipped and competent to decide. It is not proper or convenient nor desirable for a Writ Court to go into such disputed questions of fact.
(42) Further, the decision of the TPO is in the nature of an opinion. The TPO will send his opinion to the Assessing Officer who shall conduct the reassessment proceeding taking into consideration such opinion of the TPO and upon notice to the assessee. The opinion of the TPO is not binding on the Assessing Officer. The assessee will have a second opportunity of arguing before the Assessing Officer or before the Dispute Resolution Panel as envisaged under Sec. 144C of the Act that the parties involved are not associated enterprises and hence there is no international transaction and consequently reference to the TPO was without jurisdiction. If so satisfied, the Assessing Officer would be at liberty to ignore the opinion/report of the TPO. This view of mine finds strong support from the Delhi High Court judgment in Sony India (P) Ltd.-vs.-Central Board of Direct Taxes (supra), and the Gujarat High Court judgment in the case of Veer Gems-vs.-Assistant Commissioner of Income Tax (supra). I must also keep in mind the observation of the Hon’ble Apex Court in the case of Ws. Coca Cola India Inc.-vs.-Additional Commissioner of Income Tax (supra), that the issue of transfer pricing involves establishment of certain foundational facts which cannot be dealt with in a writ petition.
(43) In principle also I am of the view that the reference to the TPO under Sec. 92CA(1) of the Act should not be interfered with by the Writ Court at this stage. The nature of transaction between PWH and Services BV is not totally clear. There appears to be several service agreements between the two enterprises, one of 1998, the second one of 2009 and the third one of 2011. Admittedly PWH received a non-refundable amount of approximately Rs. 68.51 crores during the assessment year 2011-12 and also a non refundable grant of approximately Rs. 20.76 crores during the assessment year 2010-11. The true nature of these receipts by PWH from Services BV needs to be ascertained. Nomenclature is not decisive. Showing the said amounts as non-refundable grants in the accounts of PWH may not reveal the true nature of such receipts. Further, PWH appears to have been making regular payments as service charges to Services BV but the nature of the services rendered by the said Dutch Company to PWH is not at all clear. The submissions made on behalf of the petitioners as regards the functions of Services BV and the services rendered by it are very general in nature and lacking in particulars and precision. At the cost of repetition, I say that the true nature and character of the transaction between PWH and Services BV requires to be ascertained and such factual issues cannot be and should not be gone into by the Writ Court. The IT Act has empowered the TPO to compute the arm’s length price in relation to international transactions and the said statutory authority should be allowed to discharge its functions. It is open to the writ petitioner/assessee to impress upon the TPO that no international transaction is involved, in which case, the TPO will undoubtedly return an appropriate report to the Assessing Officer. In exercise of jurisdiction under Art. 226 of the Constitution of India, I am not in a position to hold that the factual issues contemplated in Sec. 92A(1) and (2) of the Act do not exist and as such the reference to the TPO was without jurisdiction. No case of mala fide or ex facie lack of jurisdiction has been made out by the petitioners and I am of the considered opinion that I should not stifle the reference to the TPO by nipping the same in the bud. If the stand of the writ petitioner company is bona fide and indeed if no international transaction is involved, I see no reason why the company should shy away from the proceeding before the TPO and not urge and establish the same in the proceeding before the TPO.
(44) Mr. Pal also submitted that in the assessment year 2010-11, the Department accepted the fact that the transactions between PWH and Services BV are not international transactions within the meaning of Sec. 92B of the Act. Hence, there can be no justification for the Department to take a different view for the subsequent year on the same set of facts. In this connection Learned Senior Counsel relied on a Supreme Court decision in the case of M/S. Radhasoami Satsang (supra). I am unable to subscribe to the contention that just because in a particular assessment year the transactions between the two parties were held not to be international transactions, in a subsequent year the transactions between those parties cannot be held to be international transactions. As I read the Hon’ble Supreme Court’s decision referred to above, no absolute proposition of law to that effect has been laid down. New facts may emerge or old facts which were hitherto not in the knowledge of the Department may come to light justifying the Department taking a different view in a subsequent assessment year. In any event, it will be open for PWH to urge this point also before the TPO.
(45) The submission of Learned Counsel for the respondents as regards the compensation paid for penalties levied by the USA authorities by the PwC group of firms also warrants due consideration. Did PWH make any claim under the Insurance Policy for the penalties imposed on it? Is it correct that one PWC paid the insurance premium but all other networking firms were also covered by the Policy? These are also factors which will determine the true nature of relationship between PWH and BV Services.
(46) In view of the aforesaid, I am not inclined to interfere with the orders under challenge at this stage. Diverse factual issues, some of which are intricate in nature, will have to be resolved in order to ascertain whether or not PWH and Services BV are involved in any international transactions within the meaning of Sec. 92B of the Act. The Writ Court is not a fact finding forum. It will be open to PWH to urge all points before the TPO that have been urged before me. I express no opinion on the merits of the case advanced by the respective parties and all points are left open for the TPO to decide in accordance with law including the point of maintainability of the reference made to him uninfluenced by any observation made in this judgment and order. In the event the TPO has conducted any proceeding ex parte or has passed any order under Sec. 92CA, the same shall stand set aside. The TPO shall issue a fresh notice to the assessee and hold proceedings afresh after giving full opportunity of hearing to the assessee. In conducting the proceeding, the TPO shall strictly adhere to the principles of natural justice and shall pass a reasoned order in accordance with law.