2013 Supreme(Bom) 2375

High Court of Judicature at Bombay
MOHIT S. SHAH & M.S. SANKLECHA, JJ.
Vodafone India Services Pvt. Ltd.
Versus
Union of India, through the Secretary, Ministry of Finance & Others
Writ Petition No.1877 of 2013
Decided on : 29-11-2013

Headnote:

The Court held that the existence of an alternative remedy by itself will not bar the Court from exercising its extraordinary jurisdiction if the facts of the case so warrant. The Court further held that the Assessing Officer must be satisfied that there is an income or a potential of an income arising and/or being affected on determination of an ALP before he proceeds further in determining the ALP or referring the issue to the TPO to determine the ALP.

Fact of the Case:

The petitioner, a wholly owned subsidiary of a Mauritian Entity namely Vodafone Tele-Services (India) Holdings Ltd, issued 2,89,224 equity shares of a face value of Rs.10/- each at the premium of Rs.8591/- per share aggregating to a total consideration of Rs.246.38 Crores to its holding company. The petitioner received an amount of Rs.86.93Crores on 21 August 2008 and the balance amount of Rs.159.46 Crores on 5 November 2008 from its holding company. The petitioner filed its return of income for Assessment Year 2009-10 with the respondent-revenue. Along with its return of income, the petitioner also filed Form 3 CEB dated 28 September 2009 by an accountant in accordance with Section 92E. In the said Form, the transaction of issuance of equity shares by the petitioner to its holding company (undisputedly an Associated Enterprise) was declared as an International Transaction and also the Arms Length Price ("ALP") of the shares so issued, was also determined. However, a note was appended by the accountant to its Form 3 CEB report making it clear that the transaction of issue of equity shares did not affect income of the petitioner and was being reported only as a matter of abundant caution. The petitioner issued a notice under Section 143(2) to the petitioner for the purposes of carrying out scrutiny assessment. The Assessing Officer after obtaining the previous approval of the Commissioner of Income Tax referred all the transactions reported in Form 3 CEB dated 28 September 2009 by the petitioner to the TPO in accordance with Section 92CA(1). The TPO issued a show cause notice to the petitioner. The petitioner filed its replies to the show cause notice issued by the TPO. The TPO passed the impugned order holding that the transaction of issuance of equity shares by the petitioner to its holding company is an international transaction covered under Chapter X. In particular, it records the following findings: (ii) The issue of equity shares is an International Transaction governed by Chapter X as is evident from Form 3 CEB dated 28 September 2009 filed by the petitioner. The valuation of equity shares was arrived at by application of Comparable Uncontrolled Price method by the petitioners. (iii) The issue whether any Income has arisen and/or affected by the International Transaction for purposes of Chapter X would be determined by the Assessing Officer. The jurisdiction exercised by him is only to determine the ALP of International Transactions and not compute the income arising out of such International Transactions; (iv) The transaction was an International Transaction as is evident from the Explanation (i)(c) and (e) to Section 92B , which provides that capital financing and restructuring of business would be included within the meaning of International Transactions; (v) The issue of shares by the petitioner to its holding company at lower premium then what is due, results in the petitioner subsidizing the price payable by the holding company. This deficit would be a loan extended by the petitioner to its holding company and such loan would have bearing on the profit of the assessee in terms of interest; (vi) The ALP of the issue of equity shares by the petitioner to its holding company as determined by the Accountant under Section 92E was rejected on the ground that methodology of valuation adopted is not suitable to derive the ALP; (vii) The Transfer Pricing adjustment for the Assessment Years 2007-08 and 2008-09 have to be taken into account to determine the fair value of the Petitioner's business; (viii) Finally, the TPO determined the ALP of equity shares issued by the petitioner to its holding company as under:-

Finding of the Court:

The Court held that the Assessing Officer must be satisfied that there is an income or a potential of an income arising and/or being affected on determination of an ALP before he proceeds further in determining the ALP or referring the issue to the TPO to determine the ALP. The Court further held that the Assessing Officer has to first determine the issue of any income arising and/or being affected or potentially arising on determination of ALP before referring the transaction to the TPO, when specifically contended by the petitioner/Assessee. The Court also held that the Assessing officer is required to give a personal hearing to the assessee before referring the matter to the TPO.

Issues: 1. Whether the existence of an alternative remedy by itself will bar the Court from exercising its extraordinary jurisdiction if the facts of the case so warrant? 2. Whether the Assessing Officer must be satisfied that there is an income or a potential of an income arising and/or being affected on determination of an ALP before he proceeds further in determining the ALP or referring the issue to the TPO to determine the ALP? 3. Whether the Assessing Officer has to first determine the issue of any income arising and/or being affected or potentially arising on determination of ALP before referring the transaction to the TPO, when specifically contended by the petitioner/Assessee? 4. Whether the Assessing officer is required to give a personal hearing to the assessee before referring the matter to the TPO?

Ratio Decidendi: 1. The existence of an alternative remedy by itself will not bar the Court from exercising its extraordinary jurisdiction if the facts of the case so warrant. 2. The Assessing Officer must be satisfied that there is an income or a potential of an income arising and/or being affected on determination of an ALP before he proceeds further in determining the ALP or referring the issue to the TPO to determine the ALP. 3. The Assessing Officer has to first determine the issue of any income arising and/or being affected or potentially arising on determination of ALP before referring the transaction to the TPO, when specifically contended by the petitioner/Assessee. 4. The Assessing officer is required to give a personal hearing to the assessee before referring the matter to the TPO.

Final Decision: The Court disposed of the petition with the following directions: (A) The petitioner shall within two weeks from today submit before the DRP its preliminary objections to Draft Assessment Order and the TPO's order by raising jurisdictional issues. (B) The DRP shall decide the issue of jurisdiction before considering issue of valuation / quantification raised by the petitioner in its objections filed before the DRP, this of course subject to the additional grounds on jurisdiction being filed by the Petitioner within two weeks from today. The DRP shall decide the issue of jurisdiction as a preliminary issue within two months from the date on which the petitioner files its objections on the question of jurisdiction. (C) We make it clear that since the question of jurisdiction for applicability of Chapter X for the Assessment Year 2009-10 is raised independently of the challenge to the orders of the TPO and the AO for the Assessment Year 2008-09, the DRP shall decide the preliminary issue about applicability of Chapter X to the assessment for the Assessment Year 2009-10, without awaiting for decision on the dispute relating to the Assessment Year 2008-09. (D) We further make it clear that in case the decision of the DRP on the above preliminary issue is adverse to the petitioner, it would be open to the petitioner to challenge the order of the DRP on the preliminary issue in a writ petition if a case is made out at that stage that the decision of the DRP is patently illegal, not-withstanding the availability of alternative remedy of filing an appeal before the Income Tax Appellate Tribunal.