WP(C) 6974-2008 Page 1 of 59 +* THE HIGH COURT OF DELHI AT NEW DELHI Judgment reserved on : 11.12.2008 % Judgment delivered on : 19.12.2008 + 1. WP(C) 6974/2008 MOSER BAER INDIA LTD ..... APPELLANT versus THE ADDITIONAL COMMISSIONER OF INCOME TAX & ANR. …….RESPONDENTS 2. WP(C) 7958/2008 HCL TECHNOLOGIES BPO SERVICES LTD ….. APPELLANT versus THE ADDITIONAL COMMISSIONER OF INCOME TAX & ANR. …….RESPONDENTS 3. WP(C) 7969/2008 HCL TECHNOLOGIES LTD ..... APPELLANT versus THE ADDITIONAL COMMISSIONER OF INCOME TAX & ANR. …….RESPONDENTS 4. WP(C) 8054/2008 HAIER APPLIANCES (I) PVT LTD ..... APPELLANT versus THE ADDITIONAL COMMISSIONER OF INCOME TAX & ANR. …….RESPONDENTS 5. WP(C) 8055/2008 WP(C) 6974-2008 Page 2 of 59 GLOBAL LOGIC (I) PVT LTD ..... APPELLANT versus THE ADDITIONAL COMMISSIONER OF INCOME TAX & ANR. …….RESPONDENTS 6. WP(C) 8597/2008 KAMLA DIALS AND DEVICES LTD ..... APPELLANT versus THE ADDITIONAL COMMISSIONER OF INCOME TAX & ANR. …….RESPONDENTS Advocates who appeared in this case: For the Appellant : Mr S. Ganesh, Sr. Advocate with Mr Ajay Vohra, Ms Kavita Jha & Mr Sriram Krishna in WP(C) No 6974/2008 Mr Ajay Vohra in WP(C) Nos 7958/2008, 7969/2008, 8054/2008, 8055/2008, 8597/2008. For the Respondent : Mr. Parag P. Tripathi, ASG with Mr Sanjeev Sabharwal. CORAM :- HON'BLE MR JUSTICE BADAR DURREZ AHMED HON'BLE MR JUSTICE RAJIV SHAKDHER 1. Whether the Reporters of local papers may be allowed to see the judgment ? 2. To be referred to Reporters or not ? 3. Whether the judgment should be reported in the Digest ? RAJIV SHAKDHER, J 1. In the captioned writ petitions, a challenge has been laid to the orders passed by the Transfer Pricing Officer (hereinafter referred to as the „TPO‟) whereby he has determined the Arm‟s Length Price (hereinafter referred to as „ALP‟) in relation to „International transactions‟ entered into by each of the petitioners with their Associated WP(C) 6974-2008 Page 3 of 59 Enterprises. The orders of the TPO which have been challenged in each of the writ petitions are as follows:- (i) WP(C) No 6974/2008: Impugned order dated 22.08.2008 (ii) WP(C) No 7958/2008: Impugned order dated 23.09.2008 (iii) WP(C) No 7969/2008: Impugned order dated 30.09.2008 (iv) WP(C) No 8054/2008: Impugned order dated 24.10.2008 (v) WP(C) No 8055/2008: Impugned order dated 30.09.2008 (vi) WP(C) No 8597/2008: Impugned order dated 17.10.2008 2. The counsel for the petitioners, as well as, the Ld. ASG appearing for the respondent have addressed their submissions before us, which are, common to each of the afore-mentioned writ petitions. 2.1 The petitioners were represented by Mr S Ganesh, Sr Advocate and Mr Ajay Vohra, while the respondents were represented by Mr Parag Tripathi, Additional Solicitor General. 3. The challenge to the orders of the TPO which is mounted by the petitioners is common and it goes as follows:- a. that the TPO has not granted an oral hearing before determining the ALP in respect of international transactions entered into by the petitioner‟s with their Associated Enterprises and; WP(C) 6974-2008 Page 4 of 59 b. there has been a failure on the part of the TPO to consider documents and information filed by the petitioners, as also, non- disclosure of information and documents obtained by the TPO which were used by him in the determination of the ALP. SUBMISSIONS OF COUNSEL APPEARING FOR PARTIES: 4. In the background of the aforesaid broad ground of challenge, the contention of the counsel for parties is as under:- 4.1 The learned counsel for the petitioners submitted that the TPO in the conduct of the proceedings had been remiss, in as much as, he had failed to follow a fair procedure, while determining the ALP, in relation to, „international transactions‟ undertaken by each one of the petitioners. It was their contention that the determination of the ALP was a complex process, which, not only required the TPO to take into account the information provided by the petitioner assessee by way of an audit report in the prescribed statutory Form (i.e. Form 3CEB), as also, the evidence based on which the said audit report is generated. In the event the TPO disagreed with the ALP determined by the assessee, it could proceed to determine, the same in accordance with the provisions of Chapter X of the Act. It is the contention of the learned counsel for the petitioners, that in the event the TPO proceeds to disregard the ALP determined by the assessee and makes adjustments to the ALP determined by the assessee, it would be necessary under the scheme of Chapter X and, in WP(C) 6974-2008 Page 5 of 59 accordance with the principles of natural justice, that he confronts the assessee and/or his representatives with the material or information which could form the basis of the determination of ALP by the TPO. 4.2 It was contended by Mr S. Ganesh, Sr Advocate appearing in writ petition no. 6974/2008, that the provisions of section 92CA, sub-section (3) mandate grant of an oral hearing, before the TPO makes a determination of ALP in relation to „international transaction(s)‟ entered into by assessee‟s with their Associated Enterprise. This, according to the learned counsel, is particularly so, in view of the fact that the determination of ALP involves scrutiny and analysis of data of enterprises, which is, involved and hence, tends to be invariably complex. It was his submission that prior to the amendment brought about by virtue of Finance Act, 2007, w.e.f. 1.6.2000, the assessee was afforded an opportunity of presenting its case, both before the TPO, as well as, before the Assessing Officer. However, with the amendment brought about in section 92CA(4) by virtue of the Finance Act, 2007, the Assessing Officer is required to compute the total income of the assessee in „conformity‟ with the ALP determined by the TPO. 4.3 It is his submission that post the 2007 amendment in Section 92CA (4), the proceedings before the TPO have the colour and texture of a regular assessment under Section 143(3) of the Act. As a matter of fact, he contends that the language of the provisions of Section 143(3)(i) & WP(C) 6974-2008 Page 6 of 59 (ii) are pari materia with the provisions of sub-section (2) and (3) of Section 92CA. 4.4 Mr S. Ganesh further contended that the lack of fairness in the procedure adopted by the TPO was evident from the fact that between May, 2007 when the TPO first issued notice to the petitioner/assessee seeking information with respect to „international transactions‟ entered into by it and March,2008, eight (8) hearings were held only to obtain information from the petitioner. The first show cause notice was issued on 20.3.2008, when the TPO required the petitioner to show cause as to why an adjustment of Rs 48.11 crore ought not to be made in the ALP, in respect of international transaction(s) entered into by the petitioner with an Associated Enterprise i.e., GDM. The petitioner submitted two replies on 8.4.2008 and 15.4.2008 justifying as to why it had taken the Associated Enterprise as a tested party for determining the ALP. These replies were followed by a second show cause notice issued on 14.5.2008, whereby the TPO again sought certain information and details from the petitioners. The said information and details were supplied by the petitioner vide reply dated 22.5.2008. 4.5 It transpires that thereafter the TPO had abandoned the second show cause notice as he proceeded to issue a third notice by virtue of which, he called upon the petitioner to show cause as to why an adjustment of Rs 239.28 crore ought not be made, in respect of, WP(C) 6974-2008 Page 7 of 59 international transactions entered into by the petitioner with the associated enterprise. The learned counsel submitted that not only was the basis in the third show cause notice different, in as much as, the TPO had taken into account irrelevant data, but also that despite, the petitioner demanding an oral hearing, which is evident upon perusal of its reply dated 5.6.2008 to the third show cause notice, the TPO paid no heed to it and proceeded to determine the ALP. It was contended thus, the procedure adopted was unfair and in complete violation of the principles of natural justice and hence, the impugned decision of TPO was a nullity in the eye of law. 4.6 It was thus submitted that it is to obviate such a situation, that an oral hearing is a must both under the scheme of Chapter X, as well as, on account of the myriad complexities which arise in determination of ALP. In this regard, the learned Senior counsel placed reliance on the judgment of the Supreme Court in Travancore Rayons vs UOI: AIR 1971 SC 862 at page 864 (paragraph 7), and the judgment of Kerala High Court in Indian Transformers Ltd Vs Assstt. Collector and Anr (1983) E.L.T. 2293 at page 2300 (paragraph 7). 4.7 Similarly, Mr Ajay Vohra who appears for the petitioner in writ petition no. WP(C) No. 7958/2008, WP(C) No. 7969/2008, WP(C) No. 8054/2008, WP(C) No. 8055/2008 & WP(C) No. 8597/2008, contended that apart from the fact that the impugned orders of the TPO were liable WP(C) 6974-2008 Page 8 of 59 to be set aside on the ground that no oral hearing had been granted before the final determination of the ALP by the TPO: the impugned orders of the TPO were a nullity in the eye of law as the petitioner/assessee had not been confronted by the TPO with material or information which formed the basis for the determination of ALP by the TPO. It was the submission of Mr Vohra that it was incumbent on the TPO to confront the assessee with the material collected, and give an opportunity to the petitioners/assessee to rebut the same. In the event the TPO failed to do so, he could not have relied upon the said material which was collected behind the assessee‟s back and used without the petitioners/assessee having any notice of it. In that sense, it was contended by Mr Vohra, that it would not help the cause of the Revenue in projecting before this Court that opportunities were given by the TPO to the petitioners/assessee, if the said opportunities by way of interaction were during a period which preceded the date on which the last show cause notice, prior to determination of ALP, was issued by the TPO, especially so, if the basis adopted in the final show cause notice was different from that contained in the earlier show cause notices issued by the TPO. In support of his contention that the TPO was required to disclose the material as also confront the petitioners/assessee documents and information which formed the basis for determination of ALP by the TPO, reliance was placed on the following judgments:- WP(C) 6974-2008 Page 9 of 59 Dhakeswari Cotton Mills Ltd v. CIT: (1954) 26 ITR 775 (SC); Suraj Mall Mohta and Co vs A.V. Visvanatha Sastri and Anr.: (1954) 26 ITR 1 (SC); CIT vs East Coast Commercial Co Ltd: (1976) 63 ITR 499 (SC); Sales Tax Officer vs Uttareswari Rice Mills: (1967) 89 ITR 6 (SC); Kishinchand Chellaram vs CIT: (1980) 125 ITR 713 (SC) 5. In reply, Mr Parag Tripathi the learned ASG assisted by Mr Sanjeev Sabharwal, Advocate made the following submissions:- 5.1 At the outset, he fairly conceded that in so far as writ petition no. 6974/2008 is concerned, since an oral hearing was specifically demanded, which was not granted, by the TPO, he had instructions to say that the Department would have no objections if the matter was remanded to the TPO, provided the re-determination of ALP was permitted to be arrived at by the TPO based on material already on record. We had put this to Mr S. Ganesh, learned Sr Counsel appearing for the petitioner in the said writ petition. Mr S. Ganesh, Sr Advocate conveyed to us that he had instructions to say that this course of action was not acceptable to the petitioner if the hearing were to proceed on remand to TPO based on material already on record as such a hearing would not only be illusory, but would result, in a futile exercise as it would only impede true and correct determination of ALP. In these circumstances we were left with no choice but to proceed to decide the matter. WP(C) 6974-2008 Page 10 of 59 5.2 On the substantial issue of the scope and width of provisions of Section 92CA(3) of the Act, the Learned ASG submitted that the principles of natural justice have been complied with in each and every case. It was his submission that oral hearing was not a necessary facet of natural justice. A right to effective representation would suffice. The learned ASG in this regard relied upon the following judgments:- UOI vs Jesus Sales Corporation (1996) 4 SCC 69, pr 5, pg 74, 75; Carborundum Universal Ltd vs CBDT (989) Supp (2) SCC 462, pr 6, pg 464; Hira Nath Mishra and others vs The Principal, Rajendra Medical College (1973) 1 SCC 805, pr 12, pg 809, 810; SBI vs Allied Chemicals Lab. (2006) 9 SCC 252, pr 6, pg 253 5.3 He further submitted that the application of the principle of natural justice is always contextual, which is more so, in taxation matters. To buttress his submission reliance was placed on the following judgments of the Supreme Court:- N.K. Pasanda vs Government of India (2004) 6 SCC 299, pr 24, pg 308; Chairman, Board of Mining Examination vs Ramjee (1997) 2 SCC 256, pr 13, pg 261, 262; Ajit Kumar Nag vs General Manager, Indian Oil Corp. Ltd (2005) 7 SCC 764, pr 44, pg 785 5.4 In the alternate, the learned ASG submitted that even where oral hearings are mandatory, the failure to afford such an opportunity would not render the decision invalid solely on that ground, as a defect, if any, could be cured in the appellate proceedings. It was his contention that, WP(C) 6974-2008 Page 11 of 59 against the decision of the assessing officer, a remedy by way of an appeal to the Commissioner of Appeals was available. In support of his alternate submission, reliance was placed on the following decisions:- Lloyd vs McMahon (1987) 1 All ER 1118, Pg 1135 (h) to 1136(h) & Pg. 1171(e) to 1172(b); State Bank of Patiala vs S.K. Sharma (1996) 3 SCC 364 5.5 The learned ASG concluded by submitting that in view of the fact that there was a failure to demand an oral hearing (except in one case i.e. writ petition 6974/2008) the petitioners‟ could not complain of breach of principles of natural justice. It was his submission that this would be fatal to the case of the petitioners‟, as in the absence of demand for hearing, the orders passed by the TPO cannot be impugned on the ground of violation of principles of natural justice. In support of this submission reliance was placed on the following judgments:- State of Assam vs Gauhati Municipal Board: AIR 1967 SC 1398, Pr. 7, Pg 1399-1400; Dehri Rohtas Light Rly. Co ltd vs UOI and anr: AIR 1970 Patna 109, Pr 26, Pg 119-120 6. At this juncture, we may only note two important aspects. First, except in writ petition 6974/2008, in none of the other writ petitions has the Department filed a counter affidavit. They have proceeded to argue the matter on the basis of the impugned order(s) of the TPO. The second, that in the written submissions, filed by the respondent, an WP(C) 6974-2008 Page 12 of 59 objection has been taken to the maintainability of the writ petition, even though the same was not pressed in the hearings held before the Court. 6.1 As regard the objection taken by the respondent, with respect, to the maintainability of the writ petition, it is our view that, in the event, we were to hold that the impugned order(s) of the TPO were passed in breach of the principles of natural justice and hence, a nullity in the eye of law, the writ petition would be a proper remedy. See observations of the Supreme Court in the case of State of U.P. vs Mohd. Nooh: AIR 1958 SC 86 at pages 93 & 94(para 10 & 11) and Whirlpool Corporation vs Registrar of Trade Marks, Mumbai and Ors: (1988) 8 SCC 1 at pages 9 to 11 (para 13 to 20). 6.2 We are also of the view that availability of an alternate remedy does not debar an aggrieved party from moving the court by way of a writ petition under Article 226 of the Constitution of India. The practice adopted by Court‟s, is to normally dissuade an aggrieved party to come directly to the High Court, by exercising his right to avail of extraordinary remedy, where an effective and efficacious alternate remedy is available. This, however, is a rule of convenience and not a rule of law. The court is empowered to entertain a writ petition under Article 226 of the Constitution of India, even though there is an alternate remedy available to an aggrieved party. The discretion in this regard vests entirely with the Court which is to be exercised by the Court WP(C) 6974-2008 Page 13 of 59 keeping in mind the facts and circumstances of each case. We, accordingly, reject the objection raised by the respondents as regards the maintainability of the writ petitions on the ground of alternate remedy. 6.3 Now coming to the substantive part of the matter. The case of the petitioner is pivoted on the provisions of sub-section (3) of Section 92CA of the Act. In order to appreciate the true scope, width and amplitude of the provisions of Section 92CA(3) it would be important to set out the contextual background, purpose and object with which Chapter X of the Act, which is titled, “special provisions relating to avoidance of tax” was inserted in the Act, as also, the scheme of the chapter along with extant rules framed therewith. This exercise is necessary to appreciate the nature of enquiry to be carried out by the TPO, the provision under which the TPO is required to act and the diverse aspects of the matter which the TPO is required to deal with, are not in the least limited to the provisions of the Act. 6.4 The purpose and object of introduction of the provisions contained in Chapter X is to prevent an assessee from avoiding payment of tax by transferring income yielding assets to non-residents even while retaining the power to enjoy the fruits of such transactions i.e. the income so generated. Under the Income Tax Act, 1922, a somewhat similar provision appeared in the statute book being, Section 42(2) which, broadly provided that where a non-resident carried out business with the WP(C) 6974-2008 Page 14 of 59 person resident in the taxable territory and it appeared to the Assessing Officer that on account of a „close connection‟ between such persons the business was so arranged that the business conducted by the resident with the non-resident either yielded no profit or, less than ordinary profit, which may be expected to arise in that business then, the Assessing Officer was empowered to tax profits which were derived or which may reasonably be deemed to be derived from the business in the hands of a person resident in the taxable territory. 6.5 With the enactment of Income Tax Act, 1961 a somewhat similar provision was inserted by way of Section 92. By Finance Act, 2001 w.e.f. 1.4.2002 Section 92 was substituted by Sections 92 to 92F; provisions which are contained in Chapter X of the Act. The scope and effect of the new set of provisions that find mention in Chapter X [i.e. section 92 to 92F] was explained by the Central Board of Direct Taxes (in short „the Board‟) by its circular no. 14/2001 dated 12.12.2001 [2001 252 ITR (st.) 65]. Broadly, the Board explained that the reasons for insertion of the said Chapter was that with the increasing participation of multi-national groups in the economic activities in the country, it gave rise to „new‟ and „complex‟ issues whereby two or more enterprises of the same multi-national group would manipulate their prices in a manner which led to erosion of tax revenues. The raison d‟etre for substituting the existing section 92 of the Income Tax Act was best explained in the following paragraphs of the said Circular no. 14/2001 WP(C) 6974-2008 Page 15 of 59 “55.2Under the existing section 92 of the Income Tax Act, which was the only section dealing specifically with cross border transactions, an adjustment could be made to the profits of a resident arising from a business carried on between the resident and a non-resident, if it appeared to the Assessing Officer that owing to the close connection between them, the course of business was so arranged so s to produce less than expected profits to the resident. Rule 11 prescribed under the section provided a method of estimation of reasonable profits in such cases. However, this provision was of a general nature and limited in scope. It did not allow adjustment of income in the case of non-residents. It referred to a “close connection” which was undefined and vague. It provided for adjustment of profits rather than adjustment of prices, and the rule prescribed for estimating profits was not scientific. It also did not apply to individual transactions such as payment of royalty, etc., which are not part of a regular business carried on between a resident and a non-resident. There were also no detailed rules prescribing the documentation required to be maintained. 55.3 With a view to provide a detailed statutory framework which can lead to computation of reasonable, fair and equitable profits and tax in India, in the case of such multi-national enterprises, the Act has substituted section 92 with a new section, and has introduced new Sections 92A to 92F in the Income Tax Act, relating to computation of income from an international transaction having regard to the arm’s length price, meaning of associated enterprise, meaning of international transaction, computation of arm’s length price, maintenance of information and documents by persons entering into international transactions, furnishing of a report from an accountant by persons entering into international transactions and definitions of certain expressions occurring in the said sections.” The scheme of chapter X with reference to provisions which are relevant to the present case are as follows. WP(C) 6974-2008 Page 16 of 59 6.6 Chapter X opens with Section 92 which provides that the income arising from „international transactions” shall be calculated having regard to the ALP. The explanation to Section 92 clarifies that allowance for any expense or interest arising from an international transaction shall also be determined having regard to the ALP. 6.6.1 Section 92A defines as to which the enterprises would, for the purposes of the provisions of Chapter X, come within the purview of an Associate Enterprise. Sub-section (1) of section 92A proceeds generally to define an Associated Enterprise as one, which is, directly or indirectly, managed and controlled by another. The specifics with respect to the various modes by which control may be exerted by one enterprise on the other is provided in sub-section (2) of Section 92A. In the eventuality of an enterprise fulfilling any of the attributes provided in sub-clause (a) to clause (m), the two enterprises under sub-section (2) of section 92A would be deemed to be Associated Enterprises. 6.6.2 Section 92B defines as to what would be construed as an „international transaction‟. In order to appreciate the full width, amplitude of an „international transaction‟ the meaning of which is provided in section 92B one would have to in addition read the definition of „transaction‟ as given in section 92F(v). 6.6.3 This bring us to the provision crucial for determination of ALP, which is, Section 92C. Sub-section (1) of section 92C provides that ALP WP(C) 6974-2008 Page 17 of 59 in relation to an „international transaction; could be determined