Whether the Transfer Pricing Officer can examine any specified domestic transaction, even if the same is not specifically referred to him by the Assessing Officer?
Hon’ble Bombay High Court (HC) held that the transfer pricing officer (TPO) cannot suo-motu assume jurisdiction to determine the arm’s length price (ALP) of specified domestic transactions (SDT) not referred to him.
Facts of the case:
– Times Global Broadcasting Company Ltd (the petitioner), is a wholly owned subsidiary of Benett, Coleman and Company Ltd (BCCL) and is engaged in the business of distribution of television channels for the Times Group entities. It also provides support services to the Times Group entities in the area of finance, legal, human resources, commercial, administration and technical and broadcasting.
– The petitioner demerged one of its business undertakings into BCCL as per the scheme of demerger approved by the Bombay High Court (HC), with effect from 01.04.2014. Consequently, all the assets and liabilities pertaining to the demerged undertaking were transferred to BCCL at book value as on 31.03.2014.
– During the Assessment Year 2015-16, the petitioner reported the following specified domestic transactions (SDTs) in Form No. 3CEB :
– The case of the petitioner was selected for scrutiny assessment. During the course of the assessment proceedings, the Assessing Officer (AO) made a reference to the transfer pricing officer (TPO) for determining the arm’s length price of the SDTs reported in Form No. 3CEB. The TPO, in exercise of his presumed power under section 92CA, decided to examine the transaction of adjustment of assets on the demerger of its undertaking, which was not reported in Form No. 3CEB, along with payment of subscription fees, which was reported in Form no. 3CEB,
– The TPO made an adjustment of INR 26.55 crores made on the SDT as reported in Form No. 3CEB towards payment of subscription fees; and a further adjustment of INR 57.54 crores was made on the SDT not reported in Form No. 3CEB, which was considered by the TPO to be payment towards creditors in the demerger process. Thus, the TPO proceeded to make an upward adjustment amounting to INR 84.09 crores.
The petitioner aggrieved by the additions, challenged both the adjustments made by the TPO, by filing a writ petition before the Hon’ble Bombay HC.
Contentions of the petitioner:
– The petitioner contended that the TPO did not have the jurisdiction to make any suo-motu adjustment of INR 57.54 crores, towards the payment to creditors in the demerger process, in the absence of any specific reference made by the AO. It was also contended that even on merits, the adjustment is wholly impermissible, since in the process of demerger, no expenditure was incurred by the petitioner and hence, the said transaction would not be covered under section 92BA(i) of the Income-tax Act, 1961 (the Act).
– Further, as regards the transaction of payment of subscription fees, the petitioner contended that the same was made without proper notice.
Contentions of the revenue authorities:
– The revenue authorities contended that even if any transaction is not specifically referred by the AO, the TPO still has jurisdiction to examine any SDT. Further, the revenue authorities also contended that the petitioner had not reported the transaction of adjustment of assets on the demerger of its undertaking, in Form No. 3CEB, as according to the TPO, the same was a payment to creditor, covered under section 92BA(i).
– The revenue authorities also contended that the petition before the HC was filed prematurely and the normal appeal proceedings should be followed and hence, the HC should not examine the legality of the order of the TPO.
Relevant Provisions of the Act:
– Section 92CA of the Act pertains to reference to TPO :
(1) Where any person, being the petitioner, has entered into an international transaction [or specified domestic transaction] in any previous year, and the AO considers it necessary or expedient so to do, he may, with the previous approval of the [Principal Commissioner or] Commissioner, refer the computation of the arm’s length price in relation to the said international transaction or specified domestic transaction under section 92C to the TPO.
(2) Where a reference is made under sub-section (1), the TPO shall serve a notice on the petitioner requiring him to produce or cause to be produced on a date to be specified therein, any evidence on which the petitioner may rely in support of the computation made by him of the arm’s length price in relation to the international transaction [or specified domestic transaction] referred to in sub-section (1).
[(2A) Where any other international transaction [other than an international transaction referred under sub-section (1)], comes to the notice of the TPO during the course of the proceedings before him, the provisions of this Chapter shall apply as if such other international transaction is an international transaction referred to him under sub-section (1).]
[(2B) Where in respect of an international transaction, the assessee has not furnished the report under section 92E and such transaction comes to the notice of the Transfer Pricing Officer during the course of the proceeding before him, the provisions of this Chapter shall apply as if such transaction is an international transaction referred to him under sub-section (1).]
Key observations and the decision of the HC:
The HC, after carefully considering the facts, made the following observations:
Powers of the High Court when there is jurisdictional error or exercise without jurisdiction of the lower authorities:
– The powers conferred by Article 226 of the Constitution are extremely wide and the HC can look into jurisdictional errors or exercise of authority without jurisdiction and strike down the same. The HC relied on the decision of the Hon’ble Supreme Court in the case of Calcutta Discount Co Ltd Vs. ITO & Anr.1 and held that in case the action of the TPO was without jurisdiction then the order may be struck down.
Reference made by the AO to TPO during the assessment proceedings:
– In relation to a SDT, the TPO can undertake transfer pricing scrutiny only in relation to those transactions which are referred to him under Section 92CA(1) of the Act. The exercise of powers under Sections 92CA(2A) and 92CA(2B) are confined only to international transactions. With the aid of any interpretive process, the said provision cannot be applied to empower the TPO to examine any SDT not referred to him by the AO under Section 92CA(1). According to the HC, any other view would be doing violence to the plain language of the statute.
– Section 92CA(2A) and 92CA(2B) have been introduced by the legislature in order to overcome the limitation of the TPO to examine an international transaction which has either not been referred by the AO under Section 92CA(1) or which the petitioner has omitted to report as required under Section 92E. Section 92CA(2A)/(2B) thus takes into consideration, only international transactions, without any mention of SDTs.
– The HC stated that while making amendments in various provisions contained in Chapter X of the Act, covering the cases of SDTs in transfer pricing mechanism, did not make any such corresponding change in sub-sections (2A) or (2B) of Section 92CA.
– The HC agreed to the contention of the revenue authorities, that the petitioner did not report the transaction of INR 57.55 crores at all and therefore, the AO had no occasion to notice such transaction as SDT; his reference, therefore, was necessarily confined to the reported transactions only.
– The TPO noticed the above anomaly and he proceeded to determine the arm’s length price after providing full opportunity of hearing to the petitioner. The HC held that even in such a situation, the statute does not permit the TPO to assume the jurisdiction to determine the arm’s length price of a SDT not referred to him.
– The HC observed that it is always open for the TPO who notices such transaction during the course of the proceedings before him to call for a reference by the AO. The TPO can undertake steps as envisaged under sub-section (2) and other sub-sections of Section 92CA, only when the AO does make a reference of the transactions to the TPO. The HC held that the statute is sufficiently clear on this aspect.
– The HC held that the legislature while expanding the scope of the transfer pricing scrutiny by the TPO to a transaction not referred by the AO, under Section 92CA(2A) and Section 92CA(2B), has confined the applicability thereof only to international transactions. Hence, the TPO exercising such powers suo-motu in relation to a SDT, would be transgressing his jurisdiction and in the process would render the requirement of Section 92CA(1) redundant.
– The HC thus, held that the TPO had no jurisdiction to make any adjustments in relation to the transaction of payment to creditors in the demerger process. Therefore, the HC quashed the impugned order of the TPO so far as it provides adjustment of the arm’s length price towards payment of creditors in demerger process of a sum of INR 57.54 crores.
– With respect to the adjustment made by the TPO towards payment of subscription fees, the HC held that,
“even though the petitioner may have certain arguable points, that by itself, would not enable us to bypass the entire statutory scheme of assessment, appeal and revision. Once the TPO makes his report, the provisions are made in the statute how such report would be acted upon. The petitioner would have full innings to oppose the contents of such report and take such challenge in the appeal in case the petitioner fails at the first stage. When a statute that too, fiscal statute makes detail provisions for assessment, appeals and revisions, ordinarily the Court would not examine the issues on merits bypassing such statutory remedies.”
The decision of the HC again reiterates the basic principle that when the language of the law is sufficiently clear, the TPO cannot suo-motu assume jurisdiction to determine the ALP of specified domestic transactions not referred to him.
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1 Calcutta Discount Co Ltd Vs. ITO & Anr. (SC) 41 ITR 191