The determination of arm’s length price in relation to international transactions should occur during the course of assessment proceedings, and the belief of income escapement must be based on material on record.

JUDGMENT :

K.R. SHRIRAM, J.

1. The questions of law proposed are as under:

SUBSTANTIAL QUESTION OF LAW

1. Whether on the facts and in circumstances of the case, the Hon’ble Tribunal was correct in holding that the reasons recorded by the assessing officer in the present case does not meet with the requirement of Section 147 of the Income Tax Act 1961?

2. Whether on the facts and circumstances of the case, the Hon’ble Income Tax Appellate Tribunal was correct in holding that the Assessing Officer has no jurisdiction to issue notice under Section 148 of the Act?

3. Whether on the facts and circumstances of the case, the Hon’ble Income Tax Appellate Tribunal was justified in the quashing the order passed under Section 143(3) r/w Section 147 and 144C of the Act?

4. Whether on the facts and circumstances of the case, the Hon’ble Income Tax Appellate Tribunal was correct in holding that order of the Transfer Pricing Officer passed on 22/10/2010 is null & void ab initio as reference to the Transfer Pricing Officer to determine Arms Length Price cannot be initiated in the case of assessee, in the absence of any proceeding pending before Assessing Officer and reference for determination of Arms Length Price cannot precede the initiation of assessment proceedings by the Assessing Officer by issuance of notice u/s 143(2) of the Act?

2. Respondent is engaged in the business of manufacturing diapers and sanitary napkins. Respondent also markets the consumer tissue products. Respondent had filed return of income declaring total income at Rs.30,01,43,006/- on 31st October 2007 for Assessment Year 2007-08.

3. The return of income was processed under Section 143(1) of the Income Tax Act, 1961 (the Act). The Assessing Officer made reference under Section 92CA of the Act to the Transfer Pricing Officer (TPO) on 26th October 2009. The TPO passed an order under Section 92CA(3) of the Act on 29th October 2010 making an adjustment on account of arms length price of the international transaction at Rs.12,17,43,370/-. The Assessing Officer recorded reasons for re-opening the assessment and issued notice under Section 148 of the Act on 14th January 2011. Respondent vide its letter dated 28th January 2011 objected to the notice. It was the case of respondent that the reasons to believe income had escaped assessment was based on an invalid transfer pricing order and hence there was no reason for re-opening the assessment on the basis of the said order of TPO. The reason why respondent took this stand was because respondent’s return of income was processed under Section 143(1) of the Act and there was no assessment proceeding pending under Section 143(3) of the Act during which a reference could be made to the TPO under Section 92CA of the Act and hence such a reference to TPO itself was invalid and any order passed by the TPO would be invalid and such an invalid order of the TPO cannot be the reason for re-opening the assessment. Admittedly, no notice under Section 143(2) of the Act had also been issued. The Assessing Officer has in fact admitted that the case was not selected for scrutiny and no notice under Section 143(2) of the Act was issued but in view of the findings of the TPO he has re-opened the case for the Assessment Year 2007-08.

4. Mr. Pardiwalla submitted that where against the return of income filed by respondent in time no proceedings were initiated by issuing notice under Section 143(2) of the Act. Reference made to the TPO by the Assessing Officer under Section 92CA(1) of the Act was invalid and consequently the order passed by the TPO under Section 92CA(3) of the Act could not be the basis for recording the reasons for re-opening the assessment, i.e., initiating re-assessment proceedings. Mr. Pardiwalla submitted that where the Assessing Officer had re-opened the assessment by merely making a reference to the order of the TPO which admittedly was passed without any jurisdiction, then there was no independent application of mind by the Assessing