Full Judgment Text
+* 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 1 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 2 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 3 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 4 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 5 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 6 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 7 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 8 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 9 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 10 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 11 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 12 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 13 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 14 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 15 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 16 of 59
in relation to an „international transaction; could be determined by any of
the methods provided in the said sub-section which is „most appropriate‟
having regard to the nature of transactions or class of transaction or class
of associated persons or functions performed by such persons or such
other relevant factors which may be prescribed by the Board. The
methods provided being (a) comparable uncontrolled price method; (b)
resale price method; (c) cost plus method; (d) profit split method; (e)
transactional net margin method and; (f) such other method as may be
prescribed by the Board. In determining the most appropriate method,
regard is to be had to rules 10A and 10B of the Income Tax Rules, 1962
(in short the „Rules‟). Sub-section (3) of section 92C makes it amply
clear that the primary burden in computing the ALP is that of the
assessee. The Assessing Officer would proceed to determine the ALP in
relation to an „international transaction‟ in accordance with sub-section
(1) and (2) of section 92C only if he is of the opinion that any of the
circumstances as indicated in sub-clause (a) to sub-clause (d) of sub-
Section (3) of Section 92C prevail. The circumstances, broadly being,
that the price charged or paid for international transaction has not been
determined as prescribed under sub-section (1) and (2) of section 92C or,
the assessee has not kept information and documents of its international
transactions in the form prescribed under sub-section (1) of section 92D
and the Rules made in that behalf or, the information or data used by the
assessee in computing the ALP is not reliable or correct or, that the
WP(C) 6974-2008 Page 17 of 59
assessee, has failed to furnish, within the specified time the information
sought pursuant to a notice issued under sub-section (3) of section 92D.
Importantly, the first proviso to sub-section (3) of section 92 clearly
mandates that before the Assessing Officer proceeds to determine the
ALP on the basis of the material or information or document available
with him he shall give an opportunity by serving upon the assessee a
show cause notice fixing thereby a date and time for the said purpose.
Under sub-section (4) of section 92C the Assessing Officer can proceed
to compute the total income of the assessee only after the ALP has been
determined by the Assessing Officer as per the provision of sub-section
(3) of Section 92C.
6.6.4 Section 92CA was inserted w.e.f. 1.6.2002. Under Section 92CA,
the Assessing Officer is empowered to refer the computation of ALP, in
relation to, an „international transaction‟ under Section 92C to the TPO,
if he considers it „necessary‟ or „expedient‟ to do so with the prior
approval of the Commissioner. It is only after a reference is made under
sub-section (1) of section 92CA that the TPO enters the picture and gets
a mandate to approach upon the assessee by issuing him a notice calling
upon him to produce or cause to be produced on a date to be specified
therein, any evidence on which the assessee may rely in support of the
computation made by him of the ALP. This brings us to the provision
which is presently, in issue, before this Court i.e., sub-section (3) of
Section 92CA. The said sub-section provides that the TPO, by an order
WP(C) 6974-2008 Page 18 of 59
in writing, will determine the ALP in relation to an „international
transaction‟ in accordance with sub-section (3) of section 92C after
hearing such evidence as the assessee may produce including any
information or documents referred to in sub-section (3) of Section 92D
and after considering such evidence as the TPO may require on any
specified points, and after taking into account all relevant material which
the TPO has gathered. The TPO is required to send a copy of the order,
whereby a determination of ALP is made both to the Assessing Officer
and the assessee. Sub-section (3A) of Section 92CA provides a time
frame within which the TPO is required to pass an order under sub-
section (3) of section 92CA. Sub-section (3) of Section 92CA reads as
follows:-
“On the date specified in the notice under sub-section (2), or
as soon thereafter as may be, after hearing such evidence as
the assessee may produce, including any information or
documents referred to in sub-section (3) of Section 92D and
after considering such evidence as the Transfer Pricing
Officer may require on any specified points and after taking
into account all relevant materials which he has gathered,
the Transfer Pricing Officer shall, by order in writing,
determine the arm’s length price in relation to the
international transaction in accordance with sub-section (3)
of Section 92C and send a copy of his order to the Assessing
Officer and to the assessee.”
6.6.4.1 This brings us to the other important aspect of the matter, which
is, the change in sub-section (4) of section 92CA brought about with the
amendment carried out by virtue of Finance Act, 2007 w.e.f. 1.6.2007.
WP(C) 6974-2008 Page 19 of 59
Prior to the Finance Act, 2007, sub-section (4) of Section 92CA read as
follows:-
“On receipt of the order under sub-section (3), the
Assessing Officer shall proceed to compute the total
income of the assessee under sub-section (4) of section
92C having regard to the arm‟s length price determined
under sub-section (3) by the Transfer Pricing Officer”
Sub-section 4A post amendment w.e.f. 1.6.2007
“On receipt of the order under sub-section (3), the
Assessing Officer shall proceed to compute the total
income of the assessee under sub-section (4) of section
92C in conformity with the arm‟s length price as so
determined by the Transfer Pricing Officer”
6.6.4.2 The essential difference is that prior to the amendment, the
Assessing Officer on receipt of an order passed by the TPO under sub-
section (3) of section 92CA, would proceed to compute the total income
of the assessee under the provisions of sub-section (4) of 92C „having
regard‟ to the ALP determined by the TPO. After the amendment, the
Assessing Officer is required to compute the total income of the assessee
under sub-section (4) of section 92C in conformity with the ALP
determined by the TPO. Thus, prior to the amendment, the Assessing
Officer while computing the total income of the assessee, having regard
to the ALP so determined by the TPO, was required to give a final
opportunity to the assessee before computing the assessee‟s total income.
This is clear from the language used in sub-section (4) of section 92CA
prior to its amendment by virtue of Finance Act, 2007, as the
WP(C) 6974-2008 Page 20 of 59
determination by the TPO was not binding on the assessing officer. The
Assessing Officer was thus empowered even at the stage of computation
of total income to look into issues pertaining to determination of ALP by
the TPO. In this regard, also see observations of a Division Bench of
this Court in the case of Sony India P. Ltd vs Central Board of Direct
Taxes & Anr: (2007) 288 ITR 52 (Del) The other sub-sections not being
relevant for the purpose of these petitions, are not being discussed
herein.
6.6.5 As indicated above, Section 92D provides for information and
documents which the assessee is required to keep as may be prescribed,
in respect of its international transactions. The documentation which the
assessee is required to maintain, is provided in rule 10D of the Rules.
Sub-section (3) of Section 92D empowers the Assessing Officer or the
Commissioner (Appeals) to request the assessee to furnish any
information or document as may be sought within 30 days of being
served with such a notice. This period of 30 days on an application
being made is extendable by a further period not exceeding 30 days.
6.6.6 Section 92E provides that parties, who have entered into an
„international transaction‟ during the previous year, shall obtain a report
from an accountant and furnish such report on or before the specified
date in the prescribed form duly signed and verified in the prescribed
manner by an accountant setting forth, such particulars, as may be
WP(C) 6974-2008 Page 21 of 59
prescribed in Rule 10E. The report is required to be prepared and
submitted in the prescribed Form 3CEB.
6.6.7 Section 92F defines various terms and expressions used in Sections
92 to 92E. The definition of ALP is provided in sub-clause (ii) of
Section 92F.
6.6.8 A necessary adjunct to chapter X of the Act, are certain provisions
contained in Chapter XXI, which is, entitled “penalties imposable”. It is
pertinent to note that with the insertion of chapter X in the Act, the
legislature has also inserted the following provisions in Chapter XXI.
Explanation 7 to Section 271 has been inserted which provides that any
assessee who has entered into an international transaction as defined in
section 92B, then, in the event of any amount being allowed or
disallowed in the process of computation of total income of the assessee
under sub-section (4) of section 92C, the amount, allowed or disallowed,
will be deemed to represent the income, in respect of, which particulars
have been concealed or inaccurate particulars have been furnished unless
the assessee proves to the satisfaction of the Assessing Officer or the
Commissioner(Appeals) or the Commissioner that the price charged or
paid in such transaction was computed in accordance with the provisions
contained in section 92C and the manner prescribed under that Section,
in good faith and with due diligence. The sum and substance of the
explanation is that it deems that any adjustment made in the ALP on
WP(C) 6974-2008 Page 22 of 59
account of transfer pricing provisions will be regarded as concealment of
particulars of income or income or furnishing inaccurate particulars
under Section 271(1)(c) unless the assessee is able to establish that the
price charged or paid in respect of such an international transaction was
not only in accordance with the provision of Section 92C and the manner
prescribed in that Section, but also that, the assessee acted in good faith
and with due diligence.
6.6.9 Apart from the above, penalties are also imposable under Section
271AA for failure to keep and maintain information and documents
required under sub-section (1) or sub-section (2) of Section 92D. The
penalty prescribed is a sum equal to 2% of the value of each such
international transaction entered into by such person. Similarly, under
Section 271BA, an Assessing Officer is entitled to impose a penalty
equivalent to a sum of Rs. 1,00,000/- in the event of failure on the part of
the assessee to furnish an audit report in terms of section 92E. Lastly,
under Section 271G, the Assessing Officer or the Commissioner of
Appeals is entitled to impose penalty if the assessee fails to furnish any
information or document as required in sub-section (3) of section 92D.
Under this provision, the penalty imposable is, a sum equal to 2% of the
value of the international transaction for the each such failure.
7. An overall review of the provisions, if summarised, broadly is as
follows:-
WP(C) 6974-2008 Page 23 of 59
7.1 Under Section 92, an Assessing Officer is empowered to compute
income from international transactions which involve transfer pricing
provision having regard to ALP. The meaning of what would constitute
an associated enterprise or an international transaction is provided in
section 92A and 92B respectively. The manner of computation of ALP
is set out in section 92C. The primary burden in regard to computation
of ALP is that of the assessee, which the assessee is required to compute
by resorting to the most appropriate method amongst those mentioned in
sub-clause (a) to sub-clause(f) of sub-section (1) of section 92C, having
regard to the nature of transactions or the class of transaction or even
class of associated persons or functions performed by such persons or
such other relevant factor as may be prescribed by the Board. In this
respect, regard is required to be had to the factors prescribed in Rule
10B. In the event the Assessing Officer has doubts with regard to the
ALP determined by the assessee, having regard to the circumstances
mentioned in sub-clause (a) to (d) of sub-section (3) of section 92C, the
Assessing Officer can proceed to determine the ALP. However, while
st
doing so, the Assessing Officer is statutorily required under the first (1 )
proviso to section 92C, to give an opportunity to the assessee by issuing
him a show cause notice with respect to the same.
7.2 In the event, the Assessing Officer considers it „necessary‟ or
„expedient‟, he is empowered under Section 92CA to make a reference to
the TPO. The TPO under sub-section (2) is required to serve notice on
WP(C) 6974-2008 Page 24 of 59
the assessee to produce or cause to be produced on a date specified,
evidence which the assessee relies upon in support of computation made
by him of the ALP in relation to the international transaction. Under
sub-section (3) of Section 92CA, the TPO is required to pass an order in
writing, determining the ALP in relation to the international transaction
in accordance with the provisions of sub-section (3) of section 92C. An
important caveat in this regard is that, while determining the ALP, he is
statutorily required to hear such evidence as the assessee may produce
including information or documents referred to under sub-section (3) of
section 92D and such evidence as the TPO may require the assessee to
furnish on specified points. The provisions of sub-section (3) of section
92CA make it clear that it is only upon consideration of all such material
by way of information, documents or evidence that the TPO can proceed
to determine the ALP.
7.2.1 It is quite plain, upon reading of the provisions of sub-section (3)
of section 92CA, that the legislature has clearly cast an obligation on the
TPO to accord an oral hearing to the assessee. The submission of the
Learned ASG to the contrary is not acceptable to us. It has been
reiterated time and again by Courts in India and other jurisdictions all
over the world that authorities which have a power to decide and whose
decisions would prejudice a party, entailing civil consequences, would
be required to accord oral hearing even where the statute is silent. See
State of Orissa vs Kr (Miss) Binapani Dei: AIR 1967 SC 1269. The
WP(C) 6974-2008 Page 25 of 59
courts have gone to the extent of holding that the right to oral hearing
may not necessarily flow from a statute but flows from rule of law as
enunciated by courts. That brings us to the issue as to what could be
regarded as „civil consequences‟ in a given case. The expression of
„civil consequences‟ has been best explained by our Supreme Court in
the case of Mohinder Singh Gill vs The Chief Election Commission:
(1978) 1 SCC 405 at 440 . The Supreme Court has observed that civil
consequences involve infraction of not only property and personal rights,
but also, actions which impinge on civil liberty of an individual or result
in material deprivation or even result in non-pecuniary damages.
7.3 Keeping in mind the test as enunciated by the Supreme Court in
the case of Mohinder Singh Gill (supra) and State of Orissa vs Dr
(Miss) Bina Pani Dei (supra), we have no doubt in our minds that the
provisions of sub-section (3) of section 92CA cast a duty in no uncertain
terms on the TPO to afford an opportunity of an oral hearing. This is
clearly so in view of the fact that as courts have carved out this important
safeguard in favour of the aggrieved parties even where the statute is
silent, unless there is exclusion of such a right by way of an explicit
provision or by necessary implication. In the present case, however,
given the words of the statute, we have no doubt that the grant of oral
hearing by the TPO is mandatory. The reason for coming to such
conclusion, apart from the clear wordings of sub-section (3) of section
92CA, is that, apart from the civil consequences, that, the determination
WP(C) 6974-2008 Page 26 of 59
of ALP would have on the assessee, any adjustment by the Assessing
Officer to the ALP determined, by the assessee based on the
determination by the TPO under sub-section (3) of section 92CA, would
result in imposition of penalty under Section 271(1)(c) read with
explanation 7 of the Act. The Assessing Officer, after the amendment
brought about by virtue of Finance Act, 2007, has no choice but to
proceed to compute total income of the assessee under sub-section (4) of
section 92C in „conformity‟ with the ALP determined by the TPO. In
view of the consequences which result from the determination of the
ALP by the TPO, which are undoubtedly severe, there can be no doubt
that an oral hearing is a must.
7.4 The other submission of the Learned ASG, which is, that even if
oral hearings is considered to be mandatory, the impugned orders cannot
be rendered invalid as there was no demand for oral hearing, (except in
writ petition no 6974/2008) in our view, is not tenable. The reason being
that the Courts have time and again, exhorted that fair procedure is
required to be followed not only within its own precincts, but also, by
authorities exercising quasi-judicial and administrative powers, with a
view to achieve, at the end of the day, a result, which is, fair and just.
And this end result has to be examined by asking oneself a question as to
whether a person who, if he had knowledge of the proceedings but, was
otherwise unconcerned with the end result, would view the decision
making process, as fair. A question often asked is can a person be
WP(C) 6974-2008 Page 27 of 59
aggrieved if he has not demanded, that which is his right i.e., a right to a
fair procedure, in this case, an oral hearing. The answer to this question
is not far to seek. Where the State is a litigating party, it is, its
Constitutional obligation to adopt a procedure which is both fair and just
while dealing with its citizens. The fact that a citizen is unaware of his
legal right cannot be used as a plank to seek legal sustenance for its
actions which are otherwise invalid. It is duty of the State, in its role as
a litigating party, to inform the citizen of his right i.e., to seek an oral
hearing. An enquiry of the kind which is contemplated under Chapter X
by the TPO will achieve a far more fair result, if there is an opportunity
for an oral hearing or personal representation. The observation of
Megarry J, in John vs Rees, (1969) 2 All. ER 274 best illustrates the
point as to why it is important to give a personal hearing especially in
such like matters. The relevant extracts reads as follows:-
“It may be that there are some who would decry the
importance which the courts attach to the observance
of the rules of natural justice. “When something is
obvious,” they may say, “why force everybody to go
through the tiresome waste of time involved in
framing charges and giving an opportunity to be
heard? The result is obvious from the start.” Those
who take this view do not, I think, do themselves
justice. As everybody who has anything to do with the
law well knows, the path of the law is strewn with
examples of open and shut cases which, somehow,
were of unanswerable charges which, in the end, were
completely answered; of inexplicable conduct which
was fully explained; of fixed and unalterable
determinations that, by discussion, suffered a change.
Nor are those with any knowledge of human nature
who pause to think for a moment likely to
WP(C) 6974-2008 Page 28 of 59
underestimate the feelings of resentment of those who
find that a decision against them has been made
without their being afforded any opportunity to
influence the course of events.”
7.5 Therefore, in our opinion, the failure to demand oral hearing will
not necessarily lend sanctity or reinforce the validity of the impugned
orders in view of the fact that while determining the ALP, the TPO is
free to look at not only the material adduced by the assessee but also
information and/or evidence gathered by the TPO. According to us, it
would be difficult for the assessee to gauge before hand at the stage of
filing a written response to the queries raised in the show cause notice by
the TPO, as to whether his response has been fully appreciated by him,
and if there are any queries, whether he needs to supplement them or
dilate upon them in the background of information and documents which
may be available with the TPO of which the assessee has no notice. It is
only when the TPO examines the response of the assessee in his or his
representative‟s presence would there be a meaningful and effective
compliance with the requirement of fair procedure as contemplated in
sub-section (3) of section 92CA. In the words of Meggary J., many
„fixed and unalterable determinations‟ may suffer a change. It is,
therefore, often said that a requirement of oral hearing is usually insisted
as a matter of public policy to prevent not only a perverse decision but
also to secure, against a decision which is vitiated by “well-meaning
WP(C) 6974-2008 Page 29 of 59
ignorance or carelessness” due to absence of oral hearings. See
Commissioner of Wealth Tax vs Sir Jagdish Prasad Choudhary (1995)
211 ITR 472 (Pat.) F.B .
7.6 It is important to note that a submission was made on behalf of the
respondent, that even though there was no record of an oral hearing in
the order sheets of the TPO, but the usual practice followed by the TPO
is that when responses are filed by the assessees to a show cause notice,
there is invariably an interaction between the assessee and/or his
representatives and the TPO. This submission of the respondents will
not carry their case any further. Firstly, this fact is vehemently rebutted
by the counsel for the petitioner‟s and secondly, in any event, there is no
record of the same before us which would have us accept the version
given by the learned counsel for the respondent. Lastly, but more
importantly, if the entire thrust is on a meaningful and effective hearing,
we do not see how a brief interaction at the time of submission of the
reply by the assessee or his representative who may or may not be
equipped to answer the queries raised by the TPO would help the cause
of the Revenue or the assessee. In any event, it would be well nigh
impossible even for the TPO to appreciate the full impact of the reply
unless he has read and understood the contents of the reply filed before
him.
WP(C) 6974-2008 Page 30 of 59
8. In support of his submission that failure to demand oral hearing
would be fatal to the challenge to the impugned order on the ground of a
breach of natural justice, the learned ASG relied upon the judgment of
the Supreme Court in State of Assam vs Gauhati Municipal Board: AIR
1967 SC 1398 at page 1399-1400 (para 7) , and the judgment of the
Division Bench of the Patna High Court in Dehri Rohtas light Railway
Co vs UOI & anr AIR 1970 (Pat.) 109 page 119-120 (para 26) .
9. A perusal of the facts stated in Guahati Municipal Board (supra)
would show that the Supreme Court was dealing with a matter which
involved exercise of power, by the State of Assam, under the provision
of section 298 of the Assam Municipal Corporation Act, number XB-15
of 1957 (in short the „Municipal Act‟) in relation to supersession of the
incumbent Municipal Board. The Supreme Court noted that in order to
effectuate supersession of the Municipal Board, the only requirement
prescribed under section 298 of the Municipal Act was to give a notice
and seek an explanation of the Municipal Board, before the State
Government could pass an order superseding the Municipal Board. On
facts, the Supreme Court found that such a notice had been given to the
Municipal Board and that it had also been indicated the charges on the
basis of which the State Government had formed a tentative conclusion.
It was also found that, pursuant to such a notice by the State
Government, the Municipal Board had furnished its explanation and
consequent thereto, the State Government after considering the same had
WP(C) 6974-2008 Page 31 of 59
passed an order superseding the Board. In the context of these facts the
Supreme Court observed as follows:-
“However, we are definitely of opinion that the
provisions of S. 298 being fully complied with it cannot
be said that there was violation of principles of natural
justice in this case when the Board never demanded
what is called a personal hearing and never intimated
to the Government that it would like to produce
material in support of its explanation at some later
stage. Therefore, where a provision like S. 298 is fully
complied with as in this case and the Board does not
ask for an opportunity for personal hearing or for
production of materials in support of its explanation,
principles of natural justice do not require that the
State Government should ask the Board to appear for
a personal hearing and to produce materials in
support of the explanation. In the absence of any
demand by the Board of the nature indicated above, we
cannot agree with the High Court that merely because
the State Government did not call upon the Board to
appear for a personal hearing and to produce material
in support of its explanation it violated the principles
of natural justice.
10. As is evident, this case turned on its own facts, in particular, the
provisions of Section 298 of the said Act which, as observed by the
Supreme Court, did not envisage a personal hearing. It is in such
circumstance, the Supreme Court observed, that where a provisions like
Section 298 is fully complied with, and the Municipal Board had neither
asked for an opportunity of personal hearing or production of materials
in support of its explanation, the order of the State Government could
not have been set aside, on the ground that it did not call upon the
Municipal Board to appear in person or produce material in support of
WP(C) 6974-2008 Page 32 of 59
its explanation. In the present case, there is a statutory requirement as
observed, hereinabove and in fact a mandatory requirement to accord a
personal hearing. Hence, it cannot be said that failure to demand
personal hearing would lend efficacy to the impugned orders.
11. The other case i.e., Dehri Rohtas light Railway co (supra) which
was relied upon by the respondents is also, not of much assistance, to the
respondents. The Division Bench, in this case, followed the judgement
of the Supreme Court in Gauhati Municipal Board (supra) . The broad
facts in this case were: the Central Government was exercising a
statutory power for fixing maximum and minimum freight rates for both
government, as well as, private railway companies. It is in that context
that the Central Government sought a response from the petitioner
railway company. After considering the response of the petitioner
railway company the Central Government passed its final order. The
decision of the Central Government was, inter alia, impugned by the
petitioner railway company, on the ground that it had not been granted a
personal hearing. The Division Bench, in this case, ruled that since no
express demand has been made for personal hearing, principles of
natural justice were not violated. The judgment in Dehri Rohtas Light
Railway Co (supra) is distinguishable. In the instant case as indicated
above, there is a statutory requirement for grant of personal hearing.
WP(C) 6974-2008 Page 33 of 59
12. The other alternate submission of Ld. ASG was that, even if one
were to accept that, an oral hearing is mandatory, failure to grant such an
opportunity is a defect which could be cured by providing such an
opportunity before the appellate authorities. For this purpose, the
learned ASG relied upon the judgment of the House of Lords in Lloyds
vs McMahon: (1987) 1 All ER 1118, Pg 1135 (h) to 1136(h) & Pg.
1171(e) to 1172(b) and also the judgment of the Supreme Court in the
case of the State Bank of Patiala vs S.K. Sharma (1996) 3 SCC 364 at
page 377 (para 15) .
13. In our view, the judgment of House of Lords in the case Lloyds vs.
McMahon (supra) only enunciated a principle that the rules of natural
justice must be flexible and must depend upon the circumstances
obtaining in a case, the nature of the inquiry, the rules under which the
concerned authority is acting and also the subject matter with which the
said authority is dealing. A careful perusal of the facts in the case of
Lloyds vs McMahon (supra), would show that it was dealing with a
situation where members of the city council had failed to set up a
meeting of the council to fix a rate for a particular year. Upon failure of
the city council to perform its duty, the District Auditor in exercise of his
statutory powers notified the members of the city council that he
proposed to consider issuance of a certificate seeking to recover a certain
sum from the delinquent members on the ground that their actions had
led to a loss to the city council. The notice of the District Auditor
WP(C) 6974-2008 Page 34 of 59
identified specific losses resulting from the delay in fixing the rate; as
also the members of the city council, that is, the councillors who had by
their wilful misconduct caused the loss. The notice of the District
Auditor also stated that the members could make written representations
to the District Auditor before he reached his decision. It is in this
context the House of Lords was called upon to consider as to whether the
decision of the District Auditor could be faulted on the ground that he
had not given the affected members an opportunity of making oral
representations. It is evident that the decision of the House of Lords was
based on the circumstances obtaining in the case, the nature of inquiry,
and the statute under which the District Auditor was exercising his
powers. The House of Lords, noted that, the District Auditor was
dealing with a group of 41 councillors who had acted in concert, in
wilfully failing to discharge its duty to fix rates. They had sent their
representations and none of them, it seems, had asked to be given a
personal hearing. In these circumstances, the House of Lords came to
the conclusion that the procedure adopted by the District Auditor was
both suitable and fair. The ratio of the said decision is, as is obvious, not
applicable to the facts of the case before us. In the instant case, there is
not only a statutory requirement of an oral hearing but also the nature of
inquiry and the provisions under which the TPO exercises his powers are
entirely different. One may only point out that Court of Appeal in the
Lloyds vs. McMahon (supra) had held that the procedure adopted by the
WP(C) 6974-2008 Page 35 of 59
District Auditor fell short of fairness and since charges of bad faith and
malafides had been attributed to the councillors, oral hearing ought to
have been given. As noticed, the House of Lords, however, took a
different view of the matter.
14. As regards learned ASG‟s submission that a provision of an appeal
can cure the defect, if any, which may have crept in on failure to grant an
oral hearing, in our view does not flow from the observations made by
the House of Lords at pages 1135 (P. H to page 1136 at P C). The
crucial observations are:
“Where, however, the appeal does require an
examination of the circumstances of the case de novo on
whatever evidence may be put before the appellate court,
then the major question for consideration is, I
apprehend, whether, in the context of this particular
case, the procedure as a whole gave the appellants an
opportunity for a fair hearing......”
As to that, the appellants‟ objections to the procedure of
the District Auditor are that they did not have an
opportunity of an oral hearing and did not have an
opportunity of dealing with the District Auditor‟s
proposed findings. But on the appeal they were able to
put in, and did not put in, as much evidence as they
wished to deal with those findings and to answer every
point taken by the District Auditor, and they were given,
though they did not take advantage of it, the opportunity
of giving oral evidence....”
Applying the law as I take it to have been laid down in
Calvin v. Carr (1980) A.C. 574 and in Twist‟s case, 12
A.L.R. 379 I have no doubt that in the present case, if
there was any failure of fairness on the part of the
district auditor, either in not offering the appellants an
WP(C) 6974-2008 Page 36 of 59
oral hearing or not offering them an opportunity to
comment on his proposed findings before he rejected the
appellants‟ representations as untrue, that failure was
fully cured by the hearing in the Divisional Court under
the statutory appeal process....”
15. A close reading of the observation would show that the dictum of
the House of Lords if applied would cover those cases where an
aggrieved party has an unbridled right of appeal on facts and law, and a
complete freedom to file evidence which was not filed before the
original authority. In other words the appellate authority is required to
examine the circumstances “de novo on whatever evidence that may be
put before the appellate court”. In the instant case it cannot be disputed
that under the provisions of sub-section (4) of section 92 CA the
Assessing Officer is required to compute the total income of the assessee
in conformity with the ALP determined by the TPO. Against the order
of the Assessing Officer, an appeal is maintainable under Section 246A
of the Act. While the Commissioner of Appeals under sub-section (4) of
section 250 in disposing of any appeal before it is empowered to make
further inquiry either himself or by directing the Assessing Officer to do
so and receive the result of the same, the assessee cannot file any fresh
evidence except in accordance with the provisions of Rule 46A. The
Rule 46A inter alia permits an assessee to adduce additional evidence
only if he is able to establish that he falls under one of the following
situations envisaged under the said rule:-
WP(C) 6974-2008 Page 37 of 59
i. Where an Assessing Officer has either refused to admit
evidence which he ought to have admitted; or
ii. Where the appellant was prevented by sufficient cause from
producing the evidence which he was called upon to produce
by the Assessing Officer; or
iii. Where the appellant was prevented by sufficient cause from
producing before the Assessing Officer any evidence which
is relevant to any ground of appeal; or
iv. Where the Assessing Officer has made the order appealed
against without giving sufficient opportunity to adduce
evidence relevant to any ground of appeal.
16. It is evident that upon a bare reading of Rule 46A that the assessee
does not have a right to file additional evidence unless his case falls
within one of the situations prescribed under the Rule 46A. The
discretion to permit the assessee to adduce additional evidence lies with
the Commissioner of Appeals. Therefore, it cannot be said that the
Commissioner of Appeals is duty bound to admit any evidence that the
assessee wishes to adduce, based on which he would conduct a de novo
examination of the case before him.
17. We agree with the submission of the learned counsel for the
petitioners that the appellate proceedings as provided for under the Act
are not a substitute for the original proceeding before the TPO. The
WP(C) 6974-2008 Page 38 of 59
submission of the learned ASG that the failure to grant an oral hearing,
is a defect which could be cured by providing such an opportunity in the
appellate forum is far too expansive and cannot be accepted. Whether in
a give case an appellate forum, will be an effective substitute will
depend on the provisions of the statute, and the nature and circumstances
obtaining in the case. This, according to us, is the correct and true ratio
of judgment of House of Lords in Lloyds vs McMahon (supra) .
18. The learned authors H.W.R. Wade & C.F. Forsyth in their book on
Administrative Law, eighth edition at page 493, while noting the
judgment of the House of Lords in Lloyds vs McMohan (supra) have
commented as follows:-
“In order to preserve flexibility the courts
frequently quote general statements such as the
following:
The requirements of natural justice must depend on
the circumstances of the case, the nature of the
inquiry, the rules under which the tribunal is acting,
the subject-matter to be dealt with, and so forth.
To the same effect is a passage, much cited, in a
speech of Lord Bridge in the House of Lords.
(Lloyds vs McMohan)
“My Lords, the so called rules of natural justice are
not engraved on tablets of stone. To use the phrase
which better expresses the underlying concept, what
the requirements of fairness demand when any
body, domestic, administrative of judicial, has to
make a decision which will affect the rights of
individuals depends on the character of the
decision-making body, the kind of decision it has to
make and the statutory or other framework or other
framework in which it operates. In particular, it is
well-established that when a statute has conferred
WP(C) 6974-2008 Page 39 of 59
on any body the power to make decisions affecting
individuals, the courts will not only require the
procedure prescribed by the statute to be followed,
but will readily imply so much and no more to be
introduced by way of additional procedural
safeguards as will ensure the attainment of
fairness.”
But the flexibility of natural justices does not imply
a variable standard of procedural justice. As Sedley
J has observed:
The well attested flexibility of natural justice does
not mean that the court applies differential
standards at will, but that the application of the
principles (which, subject to known exceptions, are
constant) is necessarily as various as the situations
in which they are invoked”
18.1 It is useful to extract the comments of Sir William Wade cited
with approval in ICAI vs L.K. Ratna (1986) 4 SCC 537 at 552:
“Some of those cases as mentioned in Sir William Wade’s
th
erudite and classic work on “Administrative Law” 5
edition. But as that learned author observes (at P. 487),
“in principle there ought to be an observance of natural
justice equally at both stages”, and
“If natural justice is violated at first stage, the
right of appeal is not so much a true right of
appeal as a corrected initial hearing: instead
of fair trial followed by appeal, the procedure
is reduced to unfair trial followed by fair
trial.”
The aforesaid dicta of the Supreme Court is preceded by a felicitous
judgment of Krishna Iyer, J. (as he then was) in Mohinder Singh Gill
(supra) wherein at page 45 he cited with approval the observations of
Lord Wilberforce in Mallock vs Aberdeen Corporation , (1971) 2 All
E.R. 1278:
WP(C) 6974-2008 Page 40 of 59
“ A limited right of appeal on the merits affords no argument
against the existence of a right to a precedent hearing, and,
if that is denied to have the decision declared void.”
19. The other case on which learned ASG relied upon was State Bank
of Patiala vs S.K. Sharma (supra) . This was a case where an employee
was removed from service after a regular inquiry on the charge of
tampering and misappropriation of funds by the employee of the bank.
The issue which the Supreme Court was called upon to consider was in
the context of Regulation 68, which, inter alia, provided that copies of
the statements of witnesses, if any, recorded earlier shall be furnished to
the delinquent officer “not later than three days before the
commencement of the examination of witnesses by the inquiry
authority.”
The Supreme Court noted at page 373 (h):
“The issue boils down to this: whether the failure to
literally comply with sub-clause (iii) of clause (b) of
Regulation 68(ii)(x) vitiates the enquiry altogether or
whether it can be held in the circumstances that there
has been a substantial compliance with the said sub-
clause and that on that account, the enquiry and the
punishment awarded cannot be said to have been
vitiated.”
20. In this context, the Supreme Court, after considering the case law,
came to the conclusion that the said sub-clause (iii) of clause (b) of
Regulation 68, was not mandatory and that, even if it was mandatory
WP(C) 6974-2008 Page 41 of 59
since it was conceived in the interest of the employee and not in public
interest, it could have been waived, even if the regulation used the word
„shall‟. The Supreme Court also drew distinction in the said case with
regard to violation of rights under a substantive provision as against a
procedural provision. The Supreme Court observed that a substantive
provision has normally to be complied with and the theory of substantial
compliance or the test of prejudice would not be applicable in such case.
It went on to observe that procedural provisions are generally meant for
affording a reasonable and adequate opportunity to a delinquent
officer/employee. A violation of any and every procedural provision
cannot automatically vitiate the inquiry or an order passed except those
cases which fall under „no notice, „no opportunity‟ and „no hearing‟
categories. The complaint of violation of procedural provision should be
examined from the point of view of prejudice viz. whether such violation
has prejudiced the delinquent officers/ employee in defending himself
properly and effectively. If it is found that he has been so prejudiced,
appropriate orders have to be made to repair and remedy the prejudice
including setting aside the inquiry and/or the order of punishment. If no
prejudice is established to have resulted, therefrom, it is obvious, no
interference is called for. In this connection it may be remembered that
there may be certain procedural provisions which are of a fundamental
character whose violation is by itself proof of prejudice. It is also
observed that in the case of procedural provision which is not of a
WP(C) 6974-2008 Page 42 of 59
mandatory character, the complaint of violation has to be examined from
the stand point of substantial compliance and that the order passed in
violation of such a provision can be set aside only where such a violation
caused prejudice to the delinquent employee. The principles which
emerged in the case, were summarized by the Supreme Court at page
389 in paragraph 33, of the judgment. After perusing the facts of the
case and the principles enunciated therein, we are at a loss to understand
as to how the ratio of this decision can help the case of the respondents.
On the contrary, the observations in the judgment are against the
respondent. In the instant case, the procedure is mandatory and there is
nothing to suggest otherwise. In the present case, the provision is not
only substantive but also there is nothing to suggest that the petitioners
had waived their right of being afforded an oral hearing in the matter.
The reliance placed by the respondents on the observation made in
paragraph 15 at pages 377-378 of the judgment do not carry the case of
the respondents any further. The fact that the privy council decision in
Calvin vs. Carr was considered in Lloyds vs. McMahon (supra) in our
view would make no difference. Since we have already discussed the
case of the House of Lords in Lloyds vs. McMahon (supra) . The
discussion in paragraphs 15 at page 377-378 has to be read with
principles enunciated by the Supreme Court in the said case in paragraph
33 at page 389-391.
WP(C) 6974-2008 Page 43 of 59
21. The submission of the learned ASG that the principles of natural
justice have to be applied in taking into account the context in which the
issue arises is a proposition which we have no difficulty in accepting.
But our agreement ends there. In the context of the provisions of sub-
section (3) of section 92CA, as observed hereinabove, the requirement to
grant an oral hearing is mandatory and cannot be given a short shrift by
the TPO.
22. The judgment cited by learned ASG to support his submission that
the principles of natural justice does not necessarily imply the oral
hearing and that the right of representation would suffice were cases
where there was no statutory requirement to grant an oral hearing.
23. In UOI vs Jesus Sales Corporation (supra) the Supreme Court
was considering the impact of the third proviso to sub-section (1) of
section 4-M of the Imports and Exports (Control) Act, 1947 on the
decision impugned; whereby an application for waiver of pre-deposit of
penalty had been dismissed without giving an opportunity of personal
hearing. In the context of the said provision and the nature of the
enquiry the Supreme Court noted that the said proviso, that is, the third
proviso, which vested the power in the appellate authority to dispense
with the deposit of the amount of the penalty unconditionally or on some
conditions did not say specifically that such orders could be passed only
after hearing the parties concerned. As is obvious, the Supreme Court
WP(C) 6974-2008 Page 44 of 59
was dealing with the provision which was different from the one, we are
concerned with in the present case.
24. Similarly, the Supreme Court in Carborundum Universal Ltd
(supra) was dealing with the powers of the Central Board of Direct
Taxes (Board) to reduce and/or waive the amount of interest payable by
an assessee under Section 220(2-A) of the Income Tax Act on the
recommendation of the Commissioner in case, it was satisfied that it was
a case of genuine hardship or the default in payment of the amount on
which interest was payable was due to circumstances beyond the control
of the assessee and that the assessee had co-operated in the inquiry
relating to the assessment or in proceedings for recovery of the amount
due to him. In this context, the Supreme Court held that failure to grant
personal hearing did not vitiate the order of the Board, in the context of
the fact that firstly the section 220(2-A) of the Act did not contemplate a
hearing and secondly, the nature of the power exercised by Board was
construed as discretionary. The position in the present case is different.
The Supreme Court, however, made a pertinent observation which as a
matter of fact supports the case of the petitioners. These observations
are as follows:-
“the legal position is that where a statutory provision
does not exclude natural justice the requirement of
affording an opportunity of being heard can be issued,
particularly when the proceedings are quasi-judicial.
Exclusion, however, can either be by clear provision or
inferred from the scheme, as also the nature of power
WP(C) 6974-2008 Page 45 of 59
which is being exercised. WE have already noticed that
the power of the Board which was invoked was
discretionary. It was to be exercised on the basis of
recommendation of the Commissioner and material
provided by the assessee....”
25. The foresaid observations of the Supreme Court make it quite clear
that even where there is no provision for oral hearing it cannot be
excluded specially when proceedings are quasi-judicial in nature. The
exclusion of an oral hearing can only be where there is a clear provision
to that effect or it can be inferred from the scheme of statute. The fact
situation in the present case is quite different.
26. The third case which was relied upon by the Respondents was
State Bank of India vs Allied Chemical Lab (supra) , we find this has no
relevance to the proposition advanced before us by the learned ASG.
This is a case which dealt with a situation where the High Court had set
aside a final decree or order of the DRT in a writ petition in exercise of
its power under Article 226 and 227 of the Constitution of India, on the
ground that the DRT had rejected the application of one of the parties
before it for cross examining the deponent of an affidavit by way of
evidence, filed by the bank. The Supreme Court was of the view that the
High Court could not have set aside the decree/final order of the DRT in
exercise of its powers under Article 226 and 227 of Constitution of India
for the reasons that the grievance of the aggrieved party that it had not
been afforded an opportunity of cross-examining the deponent could
WP(C) 6974-2008 Page 46 of 59
always be set right by way of a statutory Appeal. This case has no
relevance to the facts obtaining herein.
27. The respondents also cited before us the Supreme Court judgment
in the case of Hira Nath Mishra and ors. vs The Principal, Rajendra
Medical College (supra). This was a case where the appellants before
the Supreme Court were students of a medical college, who as per the
complaints received from the girl students, late at night, entered the
compound of the girls hostel and walked in the nude. Based on the
complaint of the girl students, a Committee was constituted by the
authorities concerned. The Committee, after making the necessary
inquiry and considering the statements of the appellants, who did not
intimate that they wished to lead any evidence, came to the unanimous
conclusion that the appellants were amongst the students who had taken
part in the delinquent act. It was in this context that the Supreme Court
examined the submissions of the appellant/delinquents before them that
they were not given copies of the committee‟s report; the witnesses who
gave evidence against them were not examined in their presence; and
they were not given an opportunity to cross-examine to test the veracity
of the witnesses. In the context of the aforementioned peculiar facts, the
Supreme Court observed that the rules of natural justice were flexible,
which may differ in different circumstances. This case turned on its
facts.
WP(C) 6974-2008 Page 47 of 59
28. The case of N.K. Prasad vs Government of India and ors. (supra)
cited before us by the respondents, was also one where the Supreme
Court observed that principles of natural justice cannot be put in a
straight-jacket. Their application will depend upon the facts and
circumstance of each case. If a party after having proper notice chose
not to appear, he at a later stage cannot be permitted to say that a fair
opportunity of hearing was not afforded to him. In the present case the
respondent has not taken any such stand that the petitioners‟ were issued
any notice to appear and present their case before the TPO. The ratio of
the said authority is not applicable to the instant case.
29. In view of the discussions above we conclude:-
i. The provisions of sub-section (3) of section 92 CA casts an
obligation on the TPO to afford a personal hearing to the
assessee before he proceeds to pass a order of determining
of the ALP in terms of sub-section (3) of Section 92CA.
ii. Since such a requirement flows from a plain reading of the
provisions of sub-section (3) of section 92CA, the
determination of ALP by the TPO cannot be sustained by
taking recourse to the fact that the assessee did not demand
an oral hearing.
iii. To obviate any difficulties in future the show-cause notice
issued by the TPO just prior to the determination of ALP
WP(C) 6974-2008 Page 48 of 59
under Section 92CA(3) should refer to the documents or
material available with the Assessing Officer in relation to
the international transaction in issue. The show cause notice
should also give an option to the assessee:-
(a) both to, inspect the material available with Assessing
Officer as also the leeway to file further material or
evidence if he so desires, and
(b) to seek a personal hearing in the matter.
30. This conclusion we have arrived at keeping in mind the nature and
the complexity of the inquiry and the width and amplitude of sub-section
(3) of section 92CA, which empowers the TPO to gather evidence from
all available sources in the event the TPO disagrees with determination
of ALP by the assessee in the first instance. Therefore, the directions
issued above, if followed, would obviate any charge of breach of
principles of natural justice.
31. We would now proceed to examine the sustainability of the orders
of the TPO in each of the writ petitions in the light of the aforesaid
discussion, while touching upon only those facts (which according to us
are relevant) which impinge upon the last show cause notice issued to
the petitioners prior to determination of ALP by the TPO.
Moser Baer India Ltd vs The Additional Commissioner of Income
Tax & Anr: WP(C) No 6974/2008;
WP(C) 6974-2008 Page 49 of 59
32. In this writ petition as noted above the learned ASG has conceded
that no oral hearing has been granted even though in the reply dated
5.6.2008 pursuant to the last show cause notice dated 23.5.2008, the
petitioner had asked for a personal hearing. In view of this admitted
position we are of the view that the impugned order dated 22.8.2008
cannot be sustained. The TPO in these circumstances will, however,
commence the proceedings from the stage at which he had issued the
show cause notice dated 23.5.2008. The petitioner will within a period
of 3 days from today to file any document or information which they
think is necessary to support their case before the TPO. The TPO shall
also grant inspection of the material, document or information in its
possession and also permit the petitioner to take copies of the same on
payment of charges on which it proposes to rely upon in determination
of the ALP. The TPO shall give, by way of a notice, an opportunity of
personal hearing to the petitioner setting out the date and time for the
said purpose.
HCL Technologies BPO Services Ltd vs the Additional
Commissioner of Income Tax and Anr.: WP(C) No 7958/2008;
33. In this writ petition the order of the TPO dated 23.9.2008 is
impugned. It is averred in the writ petition that by the said order the
TPO made an adjustment of Rs 10.96 crores to the ALP of the
international transactions of the petitioner of Rs 17.60 crores. It has
averred, more specifically, in the grounds contained in paragraph 31-32
that even though the impugned order dated 23.9.2008 appears to be a
well-reasoned order in reality it is not so. One of the grievances of the
WP(C) 6974-2008 Page 50 of 59
petitioner, amongst others, is set out in paragraph 32 of the petition. The
averments are as follows:-
“The objections raised by the petitioner for considering
M/s Saffron Global and Airline Financial Support
Services (I) Ltd., the two high profit making companies
only for comparing the operating profit margin of the
petitioner and not considering the other comparable
companies satisfying the criteria laid down in the show
cause notice dated 26.8.2008 by the respondent no. 1
have been discarded primarily on the ground that the
petitioner did not inadvertently enclose the annexure
containing the necessary details. Respondent No. 1 did
not call for the relevant annexure and passed the
impugned order dated 23.9.2008, while he had time till
st
31 October, 2008 to complete such proceedings. The
action of the Respondent No. 1 disregarding the
contentions of the petitioner to proceed without calling
for the relevant details, it would be noted, was solely
directed to create an unreasonable addition by considering
a very high operating profit margin of 25.72% by taking
into account two high profit making companies, viz.
Saffron Global and Airline Financial Support Services,
ignoring the other comparable companies which
otherwise satisfied the comparability criteria to create.”
34. A perusal of comments made in paragraph 6.5(vii) of the
impugned order would show that even though there is a reference to
the contention raised by the petitioner in paragraph 32, the TPO has
not accepted the claim of the assessee on the ground that the annexure
which was filed with the letter dated 8.9.2008 which was in response
to a show cause notice dated 1.9.2008 was not considered as the
annexure 2 to the letter dated 8.9.2008 of the petitioner was not filed.
It appears that those calculations which were detailed out in the said
annexure were crucial to the case set up by the petitioner. The fact
that this annexure was inadvertently left out was within the
knowledge of the TPO and the same could have been rectified, in our
WP(C) 6974-2008 Page 51 of 59
view, by calling upon the petitioner to present his case. In the view
that we have taken hereinabove the impugned order cannot be
sustained and the same deserves to be set aside. The TPO in these
circumstances will, however, commence the proceedings from the
stage at which he had issued the show cause notice dated 1.9.2008.
The petitioner will within a period of 3 days from today to file any
document or information which they think is necessary to support
their case before the TPO. The TPO shall also grant inspection of the
material, document or information in its possession and also permit
the petitioner to take copies of the same on payment of charges, on
which it proposes to rely upon in determination of the ALP. The TPO
shall give, by way of a notice, an opportunity of personal hearing to
the petitioner setting out the date and time for the said purpose.
HCL Technologies Ltd. Vs Addl. Commissioner of Income Tax:
WP(C) N o 7969/2008;
35. In the captioned writ the order of the TPO which is impugned is
order dated 30.9.2008. The petitioner has averred in the writ petition
that by the impugned order the TPO has made an adjustment of Rs
204.25 crores to the ALP of international transaction on export of
computer software of Rs 663.19 cores. Amongst other averments, the
petitioner has elaborated on its submission by raising a pointed
objection on the issue of exclusion data relating to 43 comparable
companies in paragraphs 18 of the writ petition:-
“In response thereto, the petitioner vide replies dated
8.9.2008 and 12.9.2008 submitted arguments justifying
WP(C) 6974-2008 Page 52 of 59
the determination of the arm‟s length price of the
international transactions. The petitioner vide reply dated
8.9.2008, inter alia, requested the Respondent No. 1 to
explain the basis as to why none of the remaining 43
companies identified as comparable in the Transfer
Pricing documentation, were not found to be comparable
with the petitioner. The petitioner requested Respondent
No. 1 to provide the basis for not considering the 43
companies relied upon in the Transfer Pricing
documentation as the comparable companies. The
petitioner specifically requested the respondent no. 1 to
provide details as to what were the specific functions
being performed or risks being assumed by Infosys
Technologies Limited and Satyam Computers Services
which were not being undertaken by these 43 companies,
to seek to exclude these remaining companies for purpose
of comparison / benchmarking of the international
transactions entered into by the petitioner with its
associated enterprises.”
36. It is the grievance of the petitioner that even though in response
to a show cause notice dated 1.9.2008 the petitioner had specifically
requested the TPO to respond and /or give details or reasons as to
why the data of comparable companies was not considered for the
purposes of final determination of ALP by applying the TNMM
method. The petitioner submits that the impugned order does not
specifically deal with the said issue. It is submitted that the denial of
a fair and adequate opportunity has resulted in an adjustment of
Rs 202 crores and a resultant profits of Rs 486 crores, which is, far in
excess of the aggregate disclosed group operating profit which
includes the petitioner, as well as, the foreign associated enterprises
of Rs 418 crores for the year ended 30.6.2005. These submissions of
WP(C) 6974-2008 Page 53 of 59
the petitioner are not rebutted. Consequently, without commenting
on the merits of the matter we quash the impugned order of the TPO.
The TPO, in these circumstances will, however, commence the
proceedings from the stage at which he had issued the show cause
notice dated 1.9.2008. The petitioner will within a period of 3 days
from today to file any document or information which they think is
necessary to support their case before the TPO. The TPO shall also
grant inspection of the material, document or information in its
possession and also permit the petitioner to take copies of the same on
payment of charges, on which it proposes to rely upon in
determination of the ALP. The TPO shall give, by way of a notice, an
opportunity of personal hearing to the petitioner setting out the date
and time for the said purpose.
Haier Appliances (I) Pvt Ltd vs The Additional Commissioner of
Income Tax: WP(C) No 8054/2008;
37. In this writ petition the main grievance, amongst others is set
out in paragraph 30, 31 and 32 of the writ petition. In brief the
petitioner has said that the impugned order dated 24.10.2008 passed
by the TPO proceeds on a basis different from the show cause notice
dated 4.9.2008. It is averred that the TPO while passing the
impugned order dated 24.10.2008 had accepted the bench marking
analysis carried out by the petitioner applying TNMM method and
WP(C) 6974-2008 Page 54 of 59
did not dispute the ALP of international transactions of import of
finished products, however, the TPO made an adjustment of Rs 26.27
crores on an altogether different basis, that is, with respect to subsidy
grant against the brand promotion expenses received by the petitioner.
The petitioner is aggrieved that the adjustment of Rs 26.27 crores was
computed on a entirely different basis then that as stated in the show
cause notice. The petitioner was hence deprived of an opportunity to
meet the basis adopted by the TPO. There is no rebuttal on record
with respect to the said averment. We find that this would be a
sufficient ground to set aside the order of the TPO. The TPO in these
circumstances will, however, commence the proceedings from the
stage at which he had issued the show cause notice dated 4.9.2008.
The petitioner will within a period of 3 days from today convey to or
file any document or information which they think is necessary to
support their case before the TPO. The TPO shall also grant
inspection of the material, document or information in its possession
and also permit the petitioner to take copies of the same on payment
of charges on which it proposes to rely upon in determination of the
ALP. The TPO shall give, by way of a notice, an opportunity of
personal hearing to the petitioner setting out the date and time for the
said purpose.
Global Logic (I) Pvt ltd vs. The Additional Commissioner of
Income Tax & anr.: WP(C) No 8055/2008;
WP(C) 6974-2008 Page 55 of 59
38. In this writ petition the order dated 30.9.2008 passed by the
TPO was impugned. By the said order the TPO has made an
adjustment of Rs 2,22,55,571/- to the ALP of the international
transaction, involving rendering of a better software development
services amounting to Rs 25.62 crores. The petitioner has impugned
the order of the TPO, amongst others, on the ground that in the show
cause notice dated 26.3.2008 the TPO has proposed an adjustment of
Rs 3.281 crores and also that in the said show cause notice the TPO
had referred to 6 comparable companies. In response to the said
show cause notice the petitioner had filed a reply on 10.4.2008
wherein it had been indicated that on a correct computation of
operating profit margin of six companies identified in the show cause
notice the average operating profit margin of such companies would
work out to 9.34% as against 25.93% as shown in the show cause
notice. The petitioner followed his reply with letters dated 22.4.2008
and 28.4.2008. The petitioner‟s grievances is that despite these
replies without raising any further queries, by the impugned order
dated 30.9.2008, which was passed after a gap of 5 months, the TPO
had made an adjustment of nearly 2.22 crores after considering only
four out of the six companies as indicated in the show cause notice.
These companies were treated as comparable companies with average
operating of 21.56%. The petitioner has submitted that it was not
informed as to the basis which the TPO had applied for exclusion of
WP(C) 6974-2008 Page 56 of 59
two out of the six companies indicated initially in the show cause
notice dated 26.3.2008 issued by the TPO. There was no opportunity
to contest the calculation of the average operating margin of the four
comparable companies considered by the TPO. We find that these
facts are once again not rebutted by the respondent. The impugned
order has changed the basis as indicated in the show cause notice and
hence is quashed. The TPO in these circumstances will, however,
commence the proceedings from the stage at which he had issued the
show cause notice dated 26.3.2008. The petitioner will within a
period of 3 days from today file any document or information which
they think is necessary to support their case before the TPO. The
TPO shall also grant inspection of the material, document or
information in its possession and also permit the petitioner to take
copies of the same on payment of charges, on which it proposes to
rely upon in determination of the ALP. The TPO shall give, by way
of a notice, an opportunity of personal hearing to the petitioner setting
out the date and time for the said purpose.
Kamla Dials and Devices ltd vs The Additional Commissioner of
Income Tax and anr: WP(C) No 8579/2008;
39. Similarly, in this writ petition the order dated 17.10.2008
passed by the TPO has been impugned. The petitioner has stated that
by the impugned order TPO has made an adjustment/enhancement of
WP(C) 6974-2008 Page 57 of 59
his income to the extent of 2.51 crores. Amongst others, the
petitioner grievance is that after the issuance of the show cause notice
dated 3.10.2008 even though it furnished replies dated 10.10.2008
and 14.10.2008 wherein request was made to the TPO to provide the
material and evidence relied upon by the TPO for the proposed
adjustment as indicated in the show cause notice, the TPO did not
respond to the same and instead in haste proceeded to pass the
impugned order dated 17.10.2008. These averments are not rebutted.
We find that a fair procedure required to TPO to supply the material
based on which it proposed to make the adjustment indicated in his
show cause notice. The failure to do so in our view has vitiated the
order dated 17.10.2008 passed by the TPO. We accordingly quash
the order dated 17.10.2008. The TPO in these circumstances will,
however, commence the proceedings from the stage at which he had
issued the show cause notice dated 3.10.2008. The petitioner will
within a period of 3 days from today file any document or
information which they think is necessary to support their case before
the TPO. The TPO shall also grant inspection of the material,
document or information in its possession and also permit the
petitioner to take copies of the same on payment of charges, on which
it proposes to rely in determination of the ALP. The TPO shall give,
by way of a notice, an opportunity of personal hearing to the
petitioner setting out the date and time for the said purpose.
WP(C) 6974-2008 Page 58 of 59
39. Accordingly, the writ petitions are allowed with the directions
made hereinabove. In the circumstance there shall be no order as to
costs.
RAJIV SHAKDHER, J.
December 19, 2008 BADAR DURREZ AHMED, J.
kk
WP(C) 6974-2008 Page 59 of 59
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 1 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 2 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 3 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 4 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 5 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 6 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 7 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 8 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 9 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 10 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 11 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 12 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 13 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 14 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 15 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 16 of 59
in relation to an „international transaction; could be determined by any of
the methods provided in the said sub-section which is „most appropriate‟
having regard to the nature of transactions or class of transaction or class
of associated persons or functions performed by such persons or such
other relevant factors which may be prescribed by the Board. The
methods provided being (a) comparable uncontrolled price method; (b)
resale price method; (c) cost plus method; (d) profit split method; (e)
transactional net margin method and; (f) such other method as may be
prescribed by the Board. In determining the most appropriate method,
regard is to be had to rules 10A and 10B of the Income Tax Rules, 1962
(in short the „Rules‟). Sub-section (3) of section 92C makes it amply
clear that the primary burden in computing the ALP is that of the
assessee. The Assessing Officer would proceed to determine the ALP in
relation to an „international transaction‟ in accordance with sub-section
(1) and (2) of section 92C only if he is of the opinion that any of the
circumstances as indicated in sub-clause (a) to sub-clause (d) of sub-
Section (3) of Section 92C prevail. The circumstances, broadly being,
that the price charged or paid for international transaction has not been
determined as prescribed under sub-section (1) and (2) of section 92C or,
the assessee has not kept information and documents of its international
transactions in the form prescribed under sub-section (1) of section 92D
and the Rules made in that behalf or, the information or data used by the
assessee in computing the ALP is not reliable or correct or, that the
WP(C) 6974-2008 Page 17 of 59
assessee, has failed to furnish, within the specified time the information
sought pursuant to a notice issued under sub-section (3) of section 92D.
Importantly, the first proviso to sub-section (3) of section 92 clearly
mandates that before the Assessing Officer proceeds to determine the
ALP on the basis of the material or information or document available
with him he shall give an opportunity by serving upon the assessee a
show cause notice fixing thereby a date and time for the said purpose.
Under sub-section (4) of section 92C the Assessing Officer can proceed
to compute the total income of the assessee only after the ALP has been
determined by the Assessing Officer as per the provision of sub-section
(3) of Section 92C.
6.6.4 Section 92CA was inserted w.e.f. 1.6.2002. Under Section 92CA,
the Assessing Officer is empowered to refer the computation of ALP, in
relation to, an „international transaction‟ under Section 92C to the TPO,
if he considers it „necessary‟ or „expedient‟ to do so with the prior
approval of the Commissioner. It is only after a reference is made under
sub-section (1) of section 92CA that the TPO enters the picture and gets
a mandate to approach upon the assessee by issuing him a notice calling
upon him to produce or cause to be produced on a date to be specified
therein, any evidence on which the assessee may rely in support of the
computation made by him of the ALP. This brings us to the provision
which is presently, in issue, before this Court i.e., sub-section (3) of
Section 92CA. The said sub-section provides that the TPO, by an order
WP(C) 6974-2008 Page 18 of 59
in writing, will determine the ALP in relation to an „international
transaction‟ in accordance with sub-section (3) of section 92C after
hearing such evidence as the assessee may produce including any
information or documents referred to in sub-section (3) of Section 92D
and after considering such evidence as the TPO may require on any
specified points, and after taking into account all relevant material which
the TPO has gathered. The TPO is required to send a copy of the order,
whereby a determination of ALP is made both to the Assessing Officer
and the assessee. Sub-section (3A) of Section 92CA provides a time
frame within which the TPO is required to pass an order under sub-
section (3) of section 92CA. Sub-section (3) of Section 92CA reads as
follows:-
“On the date specified in the notice under sub-section (2), or
as soon thereafter as may be, after hearing such evidence as
the assessee may produce, including any information or
documents referred to in sub-section (3) of Section 92D and
after considering such evidence as the Transfer Pricing
Officer may require on any specified points and after taking
into account all relevant materials which he has gathered,
the Transfer Pricing Officer shall, by order in writing,
determine the arm’s length price in relation to the
international transaction in accordance with sub-section (3)
of Section 92C and send a copy of his order to the Assessing
Officer and to the assessee.”
6.6.4.1 This brings us to the other important aspect of the matter, which
is, the change in sub-section (4) of section 92CA brought about with the
amendment carried out by virtue of Finance Act, 2007 w.e.f. 1.6.2007.
WP(C) 6974-2008 Page 19 of 59
Prior to the Finance Act, 2007, sub-section (4) of Section 92CA read as
follows:-
“On receipt of the order under sub-section (3), the
Assessing Officer shall proceed to compute the total
income of the assessee under sub-section (4) of section
92C having regard to the arm‟s length price determined
under sub-section (3) by the Transfer Pricing Officer”
Sub-section 4A post amendment w.e.f. 1.6.2007
“On receipt of the order under sub-section (3), the
Assessing Officer shall proceed to compute the total
income of the assessee under sub-section (4) of section
92C in conformity with the arm‟s length price as so
determined by the Transfer Pricing Officer”
6.6.4.2 The essential difference is that prior to the amendment, the
Assessing Officer on receipt of an order passed by the TPO under sub-
section (3) of section 92CA, would proceed to compute the total income
of the assessee under the provisions of sub-section (4) of 92C „having
regard‟ to the ALP determined by the TPO. After the amendment, the
Assessing Officer is required to compute the total income of the assessee
under sub-section (4) of section 92C in conformity with the ALP
determined by the TPO. Thus, prior to the amendment, the Assessing
Officer while computing the total income of the assessee, having regard
to the ALP so determined by the TPO, was required to give a final
opportunity to the assessee before computing the assessee‟s total income.
This is clear from the language used in sub-section (4) of section 92CA
prior to its amendment by virtue of Finance Act, 2007, as the
WP(C) 6974-2008 Page 20 of 59
determination by the TPO was not binding on the assessing officer. The
Assessing Officer was thus empowered even at the stage of computation
of total income to look into issues pertaining to determination of ALP by
the TPO. In this regard, also see observations of a Division Bench of
this Court in the case of Sony India P. Ltd vs Central Board of Direct
Taxes & Anr: (2007) 288 ITR 52 (Del) The other sub-sections not being
relevant for the purpose of these petitions, are not being discussed
herein.
6.6.5 As indicated above, Section 92D provides for information and
documents which the assessee is required to keep as may be prescribed,
in respect of its international transactions. The documentation which the
assessee is required to maintain, is provided in rule 10D of the Rules.
Sub-section (3) of Section 92D empowers the Assessing Officer or the
Commissioner (Appeals) to request the assessee to furnish any
information or document as may be sought within 30 days of being
served with such a notice. This period of 30 days on an application
being made is extendable by a further period not exceeding 30 days.
6.6.6 Section 92E provides that parties, who have entered into an
„international transaction‟ during the previous year, shall obtain a report
from an accountant and furnish such report on or before the specified
date in the prescribed form duly signed and verified in the prescribed
manner by an accountant setting forth, such particulars, as may be
WP(C) 6974-2008 Page 21 of 59
prescribed in Rule 10E. The report is required to be prepared and
submitted in the prescribed Form 3CEB.
6.6.7 Section 92F defines various terms and expressions used in Sections
92 to 92E. The definition of ALP is provided in sub-clause (ii) of
Section 92F.
6.6.8 A necessary adjunct to chapter X of the Act, are certain provisions
contained in Chapter XXI, which is, entitled “penalties imposable”. It is
pertinent to note that with the insertion of chapter X in the Act, the
legislature has also inserted the following provisions in Chapter XXI.
Explanation 7 to Section 271 has been inserted which provides that any
assessee who has entered into an international transaction as defined in
section 92B, then, in the event of any amount being allowed or
disallowed in the process of computation of total income of the assessee
under sub-section (4) of section 92C, the amount, allowed or disallowed,
will be deemed to represent the income, in respect of, which particulars
have been concealed or inaccurate particulars have been furnished unless
the assessee proves to the satisfaction of the Assessing Officer or the
Commissioner(Appeals) or the Commissioner that the price charged or
paid in such transaction was computed in accordance with the provisions
contained in section 92C and the manner prescribed under that Section,
in good faith and with due diligence. The sum and substance of the
explanation is that it deems that any adjustment made in the ALP on
WP(C) 6974-2008 Page 22 of 59
account of transfer pricing provisions will be regarded as concealment of
particulars of income or income or furnishing inaccurate particulars
under Section 271(1)(c) unless the assessee is able to establish that the
price charged or paid in respect of such an international transaction was
not only in accordance with the provision of Section 92C and the manner
prescribed in that Section, but also that, the assessee acted in good faith
and with due diligence.
6.6.9 Apart from the above, penalties are also imposable under Section
271AA for failure to keep and maintain information and documents
required under sub-section (1) or sub-section (2) of Section 92D. The
penalty prescribed is a sum equal to 2% of the value of each such
international transaction entered into by such person. Similarly, under
Section 271BA, an Assessing Officer is entitled to impose a penalty
equivalent to a sum of Rs. 1,00,000/- in the event of failure on the part of
the assessee to furnish an audit report in terms of section 92E. Lastly,
under Section 271G, the Assessing Officer or the Commissioner of
Appeals is entitled to impose penalty if the assessee fails to furnish any
information or document as required in sub-section (3) of section 92D.
Under this provision, the penalty imposable is, a sum equal to 2% of the
value of the international transaction for the each such failure.
7. An overall review of the provisions, if summarised, broadly is as
follows:-
WP(C) 6974-2008 Page 23 of 59
7.1 Under Section 92, an Assessing Officer is empowered to compute
income from international transactions which involve transfer pricing
provision having regard to ALP. The meaning of what would constitute
an associated enterprise or an international transaction is provided in
section 92A and 92B respectively. The manner of computation of ALP
is set out in section 92C. The primary burden in regard to computation
of ALP is that of the assessee, which the assessee is required to compute
by resorting to the most appropriate method amongst those mentioned in
sub-clause (a) to sub-clause(f) of sub-section (1) of section 92C, having
regard to the nature of transactions or the class of transaction or even
class of associated persons or functions performed by such persons or
such other relevant factor as may be prescribed by the Board. In this
respect, regard is required to be had to the factors prescribed in Rule
10B. In the event the Assessing Officer has doubts with regard to the
ALP determined by the assessee, having regard to the circumstances
mentioned in sub-clause (a) to (d) of sub-section (3) of section 92C, the
Assessing Officer can proceed to determine the ALP. However, while
st
doing so, the Assessing Officer is statutorily required under the first (1 )
proviso to section 92C, to give an opportunity to the assessee by issuing
him a show cause notice with respect to the same.
7.2 In the event, the Assessing Officer considers it „necessary‟ or
„expedient‟, he is empowered under Section 92CA to make a reference to
the TPO. The TPO under sub-section (2) is required to serve notice on
WP(C) 6974-2008 Page 24 of 59
the assessee to produce or cause to be produced on a date specified,
evidence which the assessee relies upon in support of computation made
by him of the ALP in relation to the international transaction. Under
sub-section (3) of Section 92CA, the TPO is required to pass an order in
writing, determining the ALP in relation to the international transaction
in accordance with the provisions of sub-section (3) of section 92C. An
important caveat in this regard is that, while determining the ALP, he is
statutorily required to hear such evidence as the assessee may produce
including information or documents referred to under sub-section (3) of
section 92D and such evidence as the TPO may require the assessee to
furnish on specified points. The provisions of sub-section (3) of section
92CA make it clear that it is only upon consideration of all such material
by way of information, documents or evidence that the TPO can proceed
to determine the ALP.
7.2.1 It is quite plain, upon reading of the provisions of sub-section (3)
of section 92CA, that the legislature has clearly cast an obligation on the
TPO to accord an oral hearing to the assessee. The submission of the
Learned ASG to the contrary is not acceptable to us. It has been
reiterated time and again by Courts in India and other jurisdictions all
over the world that authorities which have a power to decide and whose
decisions would prejudice a party, entailing civil consequences, would
be required to accord oral hearing even where the statute is silent. See
State of Orissa vs Kr (Miss) Binapani Dei: AIR 1967 SC 1269. The
WP(C) 6974-2008 Page 25 of 59
courts have gone to the extent of holding that the right to oral hearing
may not necessarily flow from a statute but flows from rule of law as
enunciated by courts. That brings us to the issue as to what could be
regarded as „civil consequences‟ in a given case. The expression of
„civil consequences‟ has been best explained by our Supreme Court in
the case of Mohinder Singh Gill vs The Chief Election Commission:
(1978) 1 SCC 405 at 440 . The Supreme Court has observed that civil
consequences involve infraction of not only property and personal rights,
but also, actions which impinge on civil liberty of an individual or result
in material deprivation or even result in non-pecuniary damages.
7.3 Keeping in mind the test as enunciated by the Supreme Court in
the case of Mohinder Singh Gill (supra) and State of Orissa vs Dr
(Miss) Bina Pani Dei (supra), we have no doubt in our minds that the
provisions of sub-section (3) of section 92CA cast a duty in no uncertain
terms on the TPO to afford an opportunity of an oral hearing. This is
clearly so in view of the fact that as courts have carved out this important
safeguard in favour of the aggrieved parties even where the statute is
silent, unless there is exclusion of such a right by way of an explicit
provision or by necessary implication. In the present case, however,
given the words of the statute, we have no doubt that the grant of oral
hearing by the TPO is mandatory. The reason for coming to such
conclusion, apart from the clear wordings of sub-section (3) of section
92CA, is that, apart from the civil consequences, that, the determination
WP(C) 6974-2008 Page 26 of 59
of ALP would have on the assessee, any adjustment by the Assessing
Officer to the ALP determined, by the assessee based on the
determination by the TPO under sub-section (3) of section 92CA, would
result in imposition of penalty under Section 271(1)(c) read with
explanation 7 of the Act. The Assessing Officer, after the amendment
brought about by virtue of Finance Act, 2007, has no choice but to
proceed to compute total income of the assessee under sub-section (4) of
section 92C in „conformity‟ with the ALP determined by the TPO. In
view of the consequences which result from the determination of the
ALP by the TPO, which are undoubtedly severe, there can be no doubt
that an oral hearing is a must.
7.4 The other submission of the Learned ASG, which is, that even if
oral hearings is considered to be mandatory, the impugned orders cannot
be rendered invalid as there was no demand for oral hearing, (except in
writ petition no 6974/2008) in our view, is not tenable. The reason being
that the Courts have time and again, exhorted that fair procedure is
required to be followed not only within its own precincts, but also, by
authorities exercising quasi-judicial and administrative powers, with a
view to achieve, at the end of the day, a result, which is, fair and just.
And this end result has to be examined by asking oneself a question as to
whether a person who, if he had knowledge of the proceedings but, was
otherwise unconcerned with the end result, would view the decision
making process, as fair. A question often asked is can a person be
WP(C) 6974-2008 Page 27 of 59
aggrieved if he has not demanded, that which is his right i.e., a right to a
fair procedure, in this case, an oral hearing. The answer to this question
is not far to seek. Where the State is a litigating party, it is, its
Constitutional obligation to adopt a procedure which is both fair and just
while dealing with its citizens. The fact that a citizen is unaware of his
legal right cannot be used as a plank to seek legal sustenance for its
actions which are otherwise invalid. It is duty of the State, in its role as
a litigating party, to inform the citizen of his right i.e., to seek an oral
hearing. An enquiry of the kind which is contemplated under Chapter X
by the TPO will achieve a far more fair result, if there is an opportunity
for an oral hearing or personal representation. The observation of
Megarry J, in John vs Rees, (1969) 2 All. ER 274 best illustrates the
point as to why it is important to give a personal hearing especially in
such like matters. The relevant extracts reads as follows:-
“It may be that there are some who would decry the
importance which the courts attach to the observance
of the rules of natural justice. “When something is
obvious,” they may say, “why force everybody to go
through the tiresome waste of time involved in
framing charges and giving an opportunity to be
heard? The result is obvious from the start.” Those
who take this view do not, I think, do themselves
justice. As everybody who has anything to do with the
law well knows, the path of the law is strewn with
examples of open and shut cases which, somehow,
were of unanswerable charges which, in the end, were
completely answered; of inexplicable conduct which
was fully explained; of fixed and unalterable
determinations that, by discussion, suffered a change.
Nor are those with any knowledge of human nature
who pause to think for a moment likely to
WP(C) 6974-2008 Page 28 of 59
underestimate the feelings of resentment of those who
find that a decision against them has been made
without their being afforded any opportunity to
influence the course of events.”
7.5 Therefore, in our opinion, the failure to demand oral hearing will
not necessarily lend sanctity or reinforce the validity of the impugned
orders in view of the fact that while determining the ALP, the TPO is
free to look at not only the material adduced by the assessee but also
information and/or evidence gathered by the TPO. According to us, it
would be difficult for the assessee to gauge before hand at the stage of
filing a written response to the queries raised in the show cause notice by
the TPO, as to whether his response has been fully appreciated by him,
and if there are any queries, whether he needs to supplement them or
dilate upon them in the background of information and documents which
may be available with the TPO of which the assessee has no notice. It is
only when the TPO examines the response of the assessee in his or his
representative‟s presence would there be a meaningful and effective
compliance with the requirement of fair procedure as contemplated in
sub-section (3) of section 92CA. In the words of Meggary J., many
„fixed and unalterable determinations‟ may suffer a change. It is,
therefore, often said that a requirement of oral hearing is usually insisted
as a matter of public policy to prevent not only a perverse decision but
also to secure, against a decision which is vitiated by “well-meaning
WP(C) 6974-2008 Page 29 of 59
ignorance or carelessness” due to absence of oral hearings. See
Commissioner of Wealth Tax vs Sir Jagdish Prasad Choudhary (1995)
211 ITR 472 (Pat.) F.B .
7.6 It is important to note that a submission was made on behalf of the
respondent, that even though there was no record of an oral hearing in
the order sheets of the TPO, but the usual practice followed by the TPO
is that when responses are filed by the assessees to a show cause notice,
there is invariably an interaction between the assessee and/or his
representatives and the TPO. This submission of the respondents will
not carry their case any further. Firstly, this fact is vehemently rebutted
by the counsel for the petitioner‟s and secondly, in any event, there is no
record of the same before us which would have us accept the version
given by the learned counsel for the respondent. Lastly, but more
importantly, if the entire thrust is on a meaningful and effective hearing,
we do not see how a brief interaction at the time of submission of the
reply by the assessee or his representative who may or may not be
equipped to answer the queries raised by the TPO would help the cause
of the Revenue or the assessee. In any event, it would be well nigh
impossible even for the TPO to appreciate the full impact of the reply
unless he has read and understood the contents of the reply filed before
him.
WP(C) 6974-2008 Page 30 of 59
8. In support of his submission that failure to demand oral hearing
would be fatal to the challenge to the impugned order on the ground of a
breach of natural justice, the learned ASG relied upon the judgment of
the Supreme Court in State of Assam vs Gauhati Municipal Board: AIR
1967 SC 1398 at page 1399-1400 (para 7) , and the judgment of the
Division Bench of the Patna High Court in Dehri Rohtas light Railway
Co vs UOI & anr AIR 1970 (Pat.) 109 page 119-120 (para 26) .
9. A perusal of the facts stated in Guahati Municipal Board (supra)
would show that the Supreme Court was dealing with a matter which
involved exercise of power, by the State of Assam, under the provision
of section 298 of the Assam Municipal Corporation Act, number XB-15
of 1957 (in short the „Municipal Act‟) in relation to supersession of the
incumbent Municipal Board. The Supreme Court noted that in order to
effectuate supersession of the Municipal Board, the only requirement
prescribed under section 298 of the Municipal Act was to give a notice
and seek an explanation of the Municipal Board, before the State
Government could pass an order superseding the Municipal Board. On
facts, the Supreme Court found that such a notice had been given to the
Municipal Board and that it had also been indicated the charges on the
basis of which the State Government had formed a tentative conclusion.
It was also found that, pursuant to such a notice by the State
Government, the Municipal Board had furnished its explanation and
consequent thereto, the State Government after considering the same had
WP(C) 6974-2008 Page 31 of 59
passed an order superseding the Board. In the context of these facts the
Supreme Court observed as follows:-
“However, we are definitely of opinion that the
provisions of S. 298 being fully complied with it cannot
be said that there was violation of principles of natural
justice in this case when the Board never demanded
what is called a personal hearing and never intimated
to the Government that it would like to produce
material in support of its explanation at some later
stage. Therefore, where a provision like S. 298 is fully
complied with as in this case and the Board does not
ask for an opportunity for personal hearing or for
production of materials in support of its explanation,
principles of natural justice do not require that the
State Government should ask the Board to appear for
a personal hearing and to produce materials in
support of the explanation. In the absence of any
demand by the Board of the nature indicated above, we
cannot agree with the High Court that merely because
the State Government did not call upon the Board to
appear for a personal hearing and to produce material
in support of its explanation it violated the principles
of natural justice.
10. As is evident, this case turned on its own facts, in particular, the
provisions of Section 298 of the said Act which, as observed by the
Supreme Court, did not envisage a personal hearing. It is in such
circumstance, the Supreme Court observed, that where a provisions like
Section 298 is fully complied with, and the Municipal Board had neither
asked for an opportunity of personal hearing or production of materials
in support of its explanation, the order of the State Government could
not have been set aside, on the ground that it did not call upon the
Municipal Board to appear in person or produce material in support of
WP(C) 6974-2008 Page 32 of 59
its explanation. In the present case, there is a statutory requirement as
observed, hereinabove and in fact a mandatory requirement to accord a
personal hearing. Hence, it cannot be said that failure to demand
personal hearing would lend efficacy to the impugned orders.
11. The other case i.e., Dehri Rohtas light Railway co (supra) which
was relied upon by the respondents is also, not of much assistance, to the
respondents. The Division Bench, in this case, followed the judgement
of the Supreme Court in Gauhati Municipal Board (supra) . The broad
facts in this case were: the Central Government was exercising a
statutory power for fixing maximum and minimum freight rates for both
government, as well as, private railway companies. It is in that context
that the Central Government sought a response from the petitioner
railway company. After considering the response of the petitioner
railway company the Central Government passed its final order. The
decision of the Central Government was, inter alia, impugned by the
petitioner railway company, on the ground that it had not been granted a
personal hearing. The Division Bench, in this case, ruled that since no
express demand has been made for personal hearing, principles of
natural justice were not violated. The judgment in Dehri Rohtas Light
Railway Co (supra) is distinguishable. In the instant case as indicated
above, there is a statutory requirement for grant of personal hearing.
WP(C) 6974-2008 Page 33 of 59
12. The other alternate submission of Ld. ASG was that, even if one
were to accept that, an oral hearing is mandatory, failure to grant such an
opportunity is a defect which could be cured by providing such an
opportunity before the appellate authorities. For this purpose, the
learned ASG relied upon the judgment of the House of Lords in Lloyds
vs McMahon: (1987) 1 All ER 1118, Pg 1135 (h) to 1136(h) & Pg.
1171(e) to 1172(b) and also the judgment of the Supreme Court in the
case of the State Bank of Patiala vs S.K. Sharma (1996) 3 SCC 364 at
page 377 (para 15) .
13. In our view, the judgment of House of Lords in the case Lloyds vs.
McMahon (supra) only enunciated a principle that the rules of natural
justice must be flexible and must depend upon the circumstances
obtaining in a case, the nature of the inquiry, the rules under which the
concerned authority is acting and also the subject matter with which the
said authority is dealing. A careful perusal of the facts in the case of
Lloyds vs McMahon (supra), would show that it was dealing with a
situation where members of the city council had failed to set up a
meeting of the council to fix a rate for a particular year. Upon failure of
the city council to perform its duty, the District Auditor in exercise of his
statutory powers notified the members of the city council that he
proposed to consider issuance of a certificate seeking to recover a certain
sum from the delinquent members on the ground that their actions had
led to a loss to the city council. The notice of the District Auditor
WP(C) 6974-2008 Page 34 of 59
identified specific losses resulting from the delay in fixing the rate; as
also the members of the city council, that is, the councillors who had by
their wilful misconduct caused the loss. The notice of the District
Auditor also stated that the members could make written representations
to the District Auditor before he reached his decision. It is in this
context the House of Lords was called upon to consider as to whether the
decision of the District Auditor could be faulted on the ground that he
had not given the affected members an opportunity of making oral
representations. It is evident that the decision of the House of Lords was
based on the circumstances obtaining in the case, the nature of inquiry,
and the statute under which the District Auditor was exercising his
powers. The House of Lords, noted that, the District Auditor was
dealing with a group of 41 councillors who had acted in concert, in
wilfully failing to discharge its duty to fix rates. They had sent their
representations and none of them, it seems, had asked to be given a
personal hearing. In these circumstances, the House of Lords came to
the conclusion that the procedure adopted by the District Auditor was
both suitable and fair. The ratio of the said decision is, as is obvious, not
applicable to the facts of the case before us. In the instant case, there is
not only a statutory requirement of an oral hearing but also the nature of
inquiry and the provisions under which the TPO exercises his powers are
entirely different. One may only point out that Court of Appeal in the
Lloyds vs. McMahon (supra) had held that the procedure adopted by the
WP(C) 6974-2008 Page 35 of 59
District Auditor fell short of fairness and since charges of bad faith and
malafides had been attributed to the councillors, oral hearing ought to
have been given. As noticed, the House of Lords, however, took a
different view of the matter.
14. As regards learned ASG‟s submission that a provision of an appeal
can cure the defect, if any, which may have crept in on failure to grant an
oral hearing, in our view does not flow from the observations made by
the House of Lords at pages 1135 (P. H to page 1136 at P C). The
crucial observations are:
“Where, however, the appeal does require an
examination of the circumstances of the case de novo on
whatever evidence may be put before the appellate court,
then the major question for consideration is, I
apprehend, whether, in the context of this particular
case, the procedure as a whole gave the appellants an
opportunity for a fair hearing......”
As to that, the appellants‟ objections to the procedure of
the District Auditor are that they did not have an
opportunity of an oral hearing and did not have an
opportunity of dealing with the District Auditor‟s
proposed findings. But on the appeal they were able to
put in, and did not put in, as much evidence as they
wished to deal with those findings and to answer every
point taken by the District Auditor, and they were given,
though they did not take advantage of it, the opportunity
of giving oral evidence....”
Applying the law as I take it to have been laid down in
Calvin v. Carr (1980) A.C. 574 and in Twist‟s case, 12
A.L.R. 379 I have no doubt that in the present case, if
there was any failure of fairness on the part of the
district auditor, either in not offering the appellants an
WP(C) 6974-2008 Page 36 of 59
oral hearing or not offering them an opportunity to
comment on his proposed findings before he rejected the
appellants‟ representations as untrue, that failure was
fully cured by the hearing in the Divisional Court under
the statutory appeal process....”
15. A close reading of the observation would show that the dictum of
the House of Lords if applied would cover those cases where an
aggrieved party has an unbridled right of appeal on facts and law, and a
complete freedom to file evidence which was not filed before the
original authority. In other words the appellate authority is required to
examine the circumstances “de novo on whatever evidence that may be
put before the appellate court”. In the instant case it cannot be disputed
that under the provisions of sub-section (4) of section 92 CA the
Assessing Officer is required to compute the total income of the assessee
in conformity with the ALP determined by the TPO. Against the order
of the Assessing Officer, an appeal is maintainable under Section 246A
of the Act. While the Commissioner of Appeals under sub-section (4) of
section 250 in disposing of any appeal before it is empowered to make
further inquiry either himself or by directing the Assessing Officer to do
so and receive the result of the same, the assessee cannot file any fresh
evidence except in accordance with the provisions of Rule 46A. The
Rule 46A inter alia permits an assessee to adduce additional evidence
only if he is able to establish that he falls under one of the following
situations envisaged under the said rule:-
WP(C) 6974-2008 Page 37 of 59
i. Where an Assessing Officer has either refused to admit
evidence which he ought to have admitted; or
ii. Where the appellant was prevented by sufficient cause from
producing the evidence which he was called upon to produce
by the Assessing Officer; or
iii. Where the appellant was prevented by sufficient cause from
producing before the Assessing Officer any evidence which
is relevant to any ground of appeal; or
iv. Where the Assessing Officer has made the order appealed
against without giving sufficient opportunity to adduce
evidence relevant to any ground of appeal.
16. It is evident that upon a bare reading of Rule 46A that the assessee
does not have a right to file additional evidence unless his case falls
within one of the situations prescribed under the Rule 46A. The
discretion to permit the assessee to adduce additional evidence lies with
the Commissioner of Appeals. Therefore, it cannot be said that the
Commissioner of Appeals is duty bound to admit any evidence that the
assessee wishes to adduce, based on which he would conduct a de novo
examination of the case before him.
17. We agree with the submission of the learned counsel for the
petitioners that the appellate proceedings as provided for under the Act
are not a substitute for the original proceeding before the TPO. The
WP(C) 6974-2008 Page 38 of 59
submission of the learned ASG that the failure to grant an oral hearing,
is a defect which could be cured by providing such an opportunity in the
appellate forum is far too expansive and cannot be accepted. Whether in
a give case an appellate forum, will be an effective substitute will
depend on the provisions of the statute, and the nature and circumstances
obtaining in the case. This, according to us, is the correct and true ratio
of judgment of House of Lords in Lloyds vs McMahon (supra) .
18. The learned authors H.W.R. Wade & C.F. Forsyth in their book on
Administrative Law, eighth edition at page 493, while noting the
judgment of the House of Lords in Lloyds vs McMohan (supra) have
commented as follows:-
“In order to preserve flexibility the courts
frequently quote general statements such as the
following:
The requirements of natural justice must depend on
the circumstances of the case, the nature of the
inquiry, the rules under which the tribunal is acting,
the subject-matter to be dealt with, and so forth.
To the same effect is a passage, much cited, in a
speech of Lord Bridge in the House of Lords.
(Lloyds vs McMohan)
“My Lords, the so called rules of natural justice are
not engraved on tablets of stone. To use the phrase
which better expresses the underlying concept, what
the requirements of fairness demand when any
body, domestic, administrative of judicial, has to
make a decision which will affect the rights of
individuals depends on the character of the
decision-making body, the kind of decision it has to
make and the statutory or other framework or other
framework in which it operates. In particular, it is
well-established that when a statute has conferred
WP(C) 6974-2008 Page 39 of 59
on any body the power to make decisions affecting
individuals, the courts will not only require the
procedure prescribed by the statute to be followed,
but will readily imply so much and no more to be
introduced by way of additional procedural
safeguards as will ensure the attainment of
fairness.”
But the flexibility of natural justices does not imply
a variable standard of procedural justice. As Sedley
J has observed:
The well attested flexibility of natural justice does
not mean that the court applies differential
standards at will, but that the application of the
principles (which, subject to known exceptions, are
constant) is necessarily as various as the situations
in which they are invoked”
18.1 It is useful to extract the comments of Sir William Wade cited
with approval in ICAI vs L.K. Ratna (1986) 4 SCC 537 at 552:
“Some of those cases as mentioned in Sir William Wade’s
th
erudite and classic work on “Administrative Law” 5
edition. But as that learned author observes (at P. 487),
“in principle there ought to be an observance of natural
justice equally at both stages”, and
“If natural justice is violated at first stage, the
right of appeal is not so much a true right of
appeal as a corrected initial hearing: instead
of fair trial followed by appeal, the procedure
is reduced to unfair trial followed by fair
trial.”
The aforesaid dicta of the Supreme Court is preceded by a felicitous
judgment of Krishna Iyer, J. (as he then was) in Mohinder Singh Gill
(supra) wherein at page 45 he cited with approval the observations of
Lord Wilberforce in Mallock vs Aberdeen Corporation , (1971) 2 All
E.R. 1278:
WP(C) 6974-2008 Page 40 of 59
“ A limited right of appeal on the merits affords no argument
against the existence of a right to a precedent hearing, and,
if that is denied to have the decision declared void.”
19. The other case on which learned ASG relied upon was State Bank
of Patiala vs S.K. Sharma (supra) . This was a case where an employee
was removed from service after a regular inquiry on the charge of
tampering and misappropriation of funds by the employee of the bank.
The issue which the Supreme Court was called upon to consider was in
the context of Regulation 68, which, inter alia, provided that copies of
the statements of witnesses, if any, recorded earlier shall be furnished to
the delinquent officer “not later than three days before the
commencement of the examination of witnesses by the inquiry
authority.”
The Supreme Court noted at page 373 (h):
“The issue boils down to this: whether the failure to
literally comply with sub-clause (iii) of clause (b) of
Regulation 68(ii)(x) vitiates the enquiry altogether or
whether it can be held in the circumstances that there
has been a substantial compliance with the said sub-
clause and that on that account, the enquiry and the
punishment awarded cannot be said to have been
vitiated.”
20. In this context, the Supreme Court, after considering the case law,
came to the conclusion that the said sub-clause (iii) of clause (b) of
Regulation 68, was not mandatory and that, even if it was mandatory
WP(C) 6974-2008 Page 41 of 59
since it was conceived in the interest of the employee and not in public
interest, it could have been waived, even if the regulation used the word
„shall‟. The Supreme Court also drew distinction in the said case with
regard to violation of rights under a substantive provision as against a
procedural provision. The Supreme Court observed that a substantive
provision has normally to be complied with and the theory of substantial
compliance or the test of prejudice would not be applicable in such case.
It went on to observe that procedural provisions are generally meant for
affording a reasonable and adequate opportunity to a delinquent
officer/employee. A violation of any and every procedural provision
cannot automatically vitiate the inquiry or an order passed except those
cases which fall under „no notice, „no opportunity‟ and „no hearing‟
categories. The complaint of violation of procedural provision should be
examined from the point of view of prejudice viz. whether such violation
has prejudiced the delinquent officers/ employee in defending himself
properly and effectively. If it is found that he has been so prejudiced,
appropriate orders have to be made to repair and remedy the prejudice
including setting aside the inquiry and/or the order of punishment. If no
prejudice is established to have resulted, therefrom, it is obvious, no
interference is called for. In this connection it may be remembered that
there may be certain procedural provisions which are of a fundamental
character whose violation is by itself proof of prejudice. It is also
observed that in the case of procedural provision which is not of a
WP(C) 6974-2008 Page 42 of 59
mandatory character, the complaint of violation has to be examined from
the stand point of substantial compliance and that the order passed in
violation of such a provision can be set aside only where such a violation
caused prejudice to the delinquent employee. The principles which
emerged in the case, were summarized by the Supreme Court at page
389 in paragraph 33, of the judgment. After perusing the facts of the
case and the principles enunciated therein, we are at a loss to understand
as to how the ratio of this decision can help the case of the respondents.
On the contrary, the observations in the judgment are against the
respondent. In the instant case, the procedure is mandatory and there is
nothing to suggest otherwise. In the present case, the provision is not
only substantive but also there is nothing to suggest that the petitioners
had waived their right of being afforded an oral hearing in the matter.
The reliance placed by the respondents on the observation made in
paragraph 15 at pages 377-378 of the judgment do not carry the case of
the respondents any further. The fact that the privy council decision in
Calvin vs. Carr was considered in Lloyds vs. McMahon (supra) in our
view would make no difference. Since we have already discussed the
case of the House of Lords in Lloyds vs. McMahon (supra) . The
discussion in paragraphs 15 at page 377-378 has to be read with
principles enunciated by the Supreme Court in the said case in paragraph
33 at page 389-391.
WP(C) 6974-2008 Page 43 of 59
21. The submission of the learned ASG that the principles of natural
justice have to be applied in taking into account the context in which the
issue arises is a proposition which we have no difficulty in accepting.
But our agreement ends there. In the context of the provisions of sub-
section (3) of section 92CA, as observed hereinabove, the requirement to
grant an oral hearing is mandatory and cannot be given a short shrift by
the TPO.
22. The judgment cited by learned ASG to support his submission that
the principles of natural justice does not necessarily imply the oral
hearing and that the right of representation would suffice were cases
where there was no statutory requirement to grant an oral hearing.
23. In UOI vs Jesus Sales Corporation (supra) the Supreme Court
was considering the impact of the third proviso to sub-section (1) of
section 4-M of the Imports and Exports (Control) Act, 1947 on the
decision impugned; whereby an application for waiver of pre-deposit of
penalty had been dismissed without giving an opportunity of personal
hearing. In the context of the said provision and the nature of the
enquiry the Supreme Court noted that the said proviso, that is, the third
proviso, which vested the power in the appellate authority to dispense
with the deposit of the amount of the penalty unconditionally or on some
conditions did not say specifically that such orders could be passed only
after hearing the parties concerned. As is obvious, the Supreme Court
WP(C) 6974-2008 Page 44 of 59
was dealing with the provision which was different from the one, we are
concerned with in the present case.
24. Similarly, the Supreme Court in Carborundum Universal Ltd
(supra) was dealing with the powers of the Central Board of Direct
Taxes (Board) to reduce and/or waive the amount of interest payable by
an assessee under Section 220(2-A) of the Income Tax Act on the
recommendation of the Commissioner in case, it was satisfied that it was
a case of genuine hardship or the default in payment of the amount on
which interest was payable was due to circumstances beyond the control
of the assessee and that the assessee had co-operated in the inquiry
relating to the assessment or in proceedings for recovery of the amount
due to him. In this context, the Supreme Court held that failure to grant
personal hearing did not vitiate the order of the Board, in the context of
the fact that firstly the section 220(2-A) of the Act did not contemplate a
hearing and secondly, the nature of the power exercised by Board was
construed as discretionary. The position in the present case is different.
The Supreme Court, however, made a pertinent observation which as a
matter of fact supports the case of the petitioners. These observations
are as follows:-
“the legal position is that where a statutory provision
does not exclude natural justice the requirement of
affording an opportunity of being heard can be issued,
particularly when the proceedings are quasi-judicial.
Exclusion, however, can either be by clear provision or
inferred from the scheme, as also the nature of power
WP(C) 6974-2008 Page 45 of 59
which is being exercised. WE have already noticed that
the power of the Board which was invoked was
discretionary. It was to be exercised on the basis of
recommendation of the Commissioner and material
provided by the assessee....”
25. The foresaid observations of the Supreme Court make it quite clear
that even where there is no provision for oral hearing it cannot be
excluded specially when proceedings are quasi-judicial in nature. The
exclusion of an oral hearing can only be where there is a clear provision
to that effect or it can be inferred from the scheme of statute. The fact
situation in the present case is quite different.
26. The third case which was relied upon by the Respondents was
State Bank of India vs Allied Chemical Lab (supra) , we find this has no
relevance to the proposition advanced before us by the learned ASG.
This is a case which dealt with a situation where the High Court had set
aside a final decree or order of the DRT in a writ petition in exercise of
its power under Article 226 and 227 of the Constitution of India, on the
ground that the DRT had rejected the application of one of the parties
before it for cross examining the deponent of an affidavit by way of
evidence, filed by the bank. The Supreme Court was of the view that the
High Court could not have set aside the decree/final order of the DRT in
exercise of its powers under Article 226 and 227 of Constitution of India
for the reasons that the grievance of the aggrieved party that it had not
been afforded an opportunity of cross-examining the deponent could
WP(C) 6974-2008 Page 46 of 59
always be set right by way of a statutory Appeal. This case has no
relevance to the facts obtaining herein.
27. The respondents also cited before us the Supreme Court judgment
in the case of Hira Nath Mishra and ors. vs The Principal, Rajendra
Medical College (supra). This was a case where the appellants before
the Supreme Court were students of a medical college, who as per the
complaints received from the girl students, late at night, entered the
compound of the girls hostel and walked in the nude. Based on the
complaint of the girl students, a Committee was constituted by the
authorities concerned. The Committee, after making the necessary
inquiry and considering the statements of the appellants, who did not
intimate that they wished to lead any evidence, came to the unanimous
conclusion that the appellants were amongst the students who had taken
part in the delinquent act. It was in this context that the Supreme Court
examined the submissions of the appellant/delinquents before them that
they were not given copies of the committee‟s report; the witnesses who
gave evidence against them were not examined in their presence; and
they were not given an opportunity to cross-examine to test the veracity
of the witnesses. In the context of the aforementioned peculiar facts, the
Supreme Court observed that the rules of natural justice were flexible,
which may differ in different circumstances. This case turned on its
facts.
WP(C) 6974-2008 Page 47 of 59
28. The case of N.K. Prasad vs Government of India and ors. (supra)
cited before us by the respondents, was also one where the Supreme
Court observed that principles of natural justice cannot be put in a
straight-jacket. Their application will depend upon the facts and
circumstance of each case. If a party after having proper notice chose
not to appear, he at a later stage cannot be permitted to say that a fair
opportunity of hearing was not afforded to him. In the present case the
respondent has not taken any such stand that the petitioners‟ were issued
any notice to appear and present their case before the TPO. The ratio of
the said authority is not applicable to the instant case.
29. In view of the discussions above we conclude:-
i. The provisions of sub-section (3) of section 92 CA casts an
obligation on the TPO to afford a personal hearing to the
assessee before he proceeds to pass a order of determining
of the ALP in terms of sub-section (3) of Section 92CA.
ii. Since such a requirement flows from a plain reading of the
provisions of sub-section (3) of section 92CA, the
determination of ALP by the TPO cannot be sustained by
taking recourse to the fact that the assessee did not demand
an oral hearing.
iii. To obviate any difficulties in future the show-cause notice
issued by the TPO just prior to the determination of ALP
WP(C) 6974-2008 Page 48 of 59
under Section 92CA(3) should refer to the documents or
material available with the Assessing Officer in relation to
the international transaction in issue. The show cause notice
should also give an option to the assessee:-
(a) both to, inspect the material available with Assessing
Officer as also the leeway to file further material or
evidence if he so desires, and
(b) to seek a personal hearing in the matter.
30. This conclusion we have arrived at keeping in mind the nature and
the complexity of the inquiry and the width and amplitude of sub-section
(3) of section 92CA, which empowers the TPO to gather evidence from
all available sources in the event the TPO disagrees with determination
of ALP by the assessee in the first instance. Therefore, the directions
issued above, if followed, would obviate any charge of breach of
principles of natural justice.
31. We would now proceed to examine the sustainability of the orders
of the TPO in each of the writ petitions in the light of the aforesaid
discussion, while touching upon only those facts (which according to us
are relevant) which impinge upon the last show cause notice issued to
the petitioners prior to determination of ALP by the TPO.
Moser Baer India Ltd vs The Additional Commissioner of Income
Tax & Anr: WP(C) No 6974/2008;
WP(C) 6974-2008 Page 49 of 59
32. In this writ petition as noted above the learned ASG has conceded
that no oral hearing has been granted even though in the reply dated
5.6.2008 pursuant to the last show cause notice dated 23.5.2008, the
petitioner had asked for a personal hearing. In view of this admitted
position we are of the view that the impugned order dated 22.8.2008
cannot be sustained. The TPO in these circumstances will, however,
commence the proceedings from the stage at which he had issued the
show cause notice dated 23.5.2008. The petitioner will within a period
of 3 days from today to file any document or information which they
think is necessary to support their case before the TPO. The TPO shall
also grant inspection of the material, document or information in its
possession and also permit the petitioner to take copies of the same on
payment of charges on which it proposes to rely upon in determination
of the ALP. The TPO shall give, by way of a notice, an opportunity of
personal hearing to the petitioner setting out the date and time for the
said purpose.
HCL Technologies BPO Services Ltd vs the Additional
Commissioner of Income Tax and Anr.: WP(C) No 7958/2008;
33. In this writ petition the order of the TPO dated 23.9.2008 is
impugned. It is averred in the writ petition that by the said order the
TPO made an adjustment of Rs 10.96 crores to the ALP of the
international transactions of the petitioner of Rs 17.60 crores. It has
averred, more specifically, in the grounds contained in paragraph 31-32
that even though the impugned order dated 23.9.2008 appears to be a
well-reasoned order in reality it is not so. One of the grievances of the
WP(C) 6974-2008 Page 50 of 59
petitioner, amongst others, is set out in paragraph 32 of the petition. The
averments are as follows:-
“The objections raised by the petitioner for considering
M/s Saffron Global and Airline Financial Support
Services (I) Ltd., the two high profit making companies
only for comparing the operating profit margin of the
petitioner and not considering the other comparable
companies satisfying the criteria laid down in the show
cause notice dated 26.8.2008 by the respondent no. 1
have been discarded primarily on the ground that the
petitioner did not inadvertently enclose the annexure
containing the necessary details. Respondent No. 1 did
not call for the relevant annexure and passed the
impugned order dated 23.9.2008, while he had time till
st
31 October, 2008 to complete such proceedings. The
action of the Respondent No. 1 disregarding the
contentions of the petitioner to proceed without calling
for the relevant details, it would be noted, was solely
directed to create an unreasonable addition by considering
a very high operating profit margin of 25.72% by taking
into account two high profit making companies, viz.
Saffron Global and Airline Financial Support Services,
ignoring the other comparable companies which
otherwise satisfied the comparability criteria to create.”
34. A perusal of comments made in paragraph 6.5(vii) of the
impugned order would show that even though there is a reference to
the contention raised by the petitioner in paragraph 32, the TPO has
not accepted the claim of the assessee on the ground that the annexure
which was filed with the letter dated 8.9.2008 which was in response
to a show cause notice dated 1.9.2008 was not considered as the
annexure 2 to the letter dated 8.9.2008 of the petitioner was not filed.
It appears that those calculations which were detailed out in the said
annexure were crucial to the case set up by the petitioner. The fact
that this annexure was inadvertently left out was within the
knowledge of the TPO and the same could have been rectified, in our
WP(C) 6974-2008 Page 51 of 59
view, by calling upon the petitioner to present his case. In the view
that we have taken hereinabove the impugned order cannot be
sustained and the same deserves to be set aside. The TPO in these
circumstances will, however, commence the proceedings from the
stage at which he had issued the show cause notice dated 1.9.2008.
The petitioner will within a period of 3 days from today to file any
document or information which they think is necessary to support
their case before the TPO. The TPO shall also grant inspection of the
material, document or information in its possession and also permit
the petitioner to take copies of the same on payment of charges, on
which it proposes to rely upon in determination of the ALP. The TPO
shall give, by way of a notice, an opportunity of personal hearing to
the petitioner setting out the date and time for the said purpose.
HCL Technologies Ltd. Vs Addl. Commissioner of Income Tax:
WP(C) N o 7969/2008;
35. In the captioned writ the order of the TPO which is impugned is
order dated 30.9.2008. The petitioner has averred in the writ petition
that by the impugned order the TPO has made an adjustment of Rs
204.25 crores to the ALP of international transaction on export of
computer software of Rs 663.19 cores. Amongst other averments, the
petitioner has elaborated on its submission by raising a pointed
objection on the issue of exclusion data relating to 43 comparable
companies in paragraphs 18 of the writ petition:-
“In response thereto, the petitioner vide replies dated
8.9.2008 and 12.9.2008 submitted arguments justifying
WP(C) 6974-2008 Page 52 of 59
the determination of the arm‟s length price of the
international transactions. The petitioner vide reply dated
8.9.2008, inter alia, requested the Respondent No. 1 to
explain the basis as to why none of the remaining 43
companies identified as comparable in the Transfer
Pricing documentation, were not found to be comparable
with the petitioner. The petitioner requested Respondent
No. 1 to provide the basis for not considering the 43
companies relied upon in the Transfer Pricing
documentation as the comparable companies. The
petitioner specifically requested the respondent no. 1 to
provide details as to what were the specific functions
being performed or risks being assumed by Infosys
Technologies Limited and Satyam Computers Services
which were not being undertaken by these 43 companies,
to seek to exclude these remaining companies for purpose
of comparison / benchmarking of the international
transactions entered into by the petitioner with its
associated enterprises.”
36. It is the grievance of the petitioner that even though in response
to a show cause notice dated 1.9.2008 the petitioner had specifically
requested the TPO to respond and /or give details or reasons as to
why the data of comparable companies was not considered for the
purposes of final determination of ALP by applying the TNMM
method. The petitioner submits that the impugned order does not
specifically deal with the said issue. It is submitted that the denial of
a fair and adequate opportunity has resulted in an adjustment of
Rs 202 crores and a resultant profits of Rs 486 crores, which is, far in
excess of the aggregate disclosed group operating profit which
includes the petitioner, as well as, the foreign associated enterprises
of Rs 418 crores for the year ended 30.6.2005. These submissions of
WP(C) 6974-2008 Page 53 of 59
the petitioner are not rebutted. Consequently, without commenting
on the merits of the matter we quash the impugned order of the TPO.
The TPO, in these circumstances will, however, commence the
proceedings from the stage at which he had issued the show cause
notice dated 1.9.2008. The petitioner will within a period of 3 days
from today to file any document or information which they think is
necessary to support their case before the TPO. The TPO shall also
grant inspection of the material, document or information in its
possession and also permit the petitioner to take copies of the same on
payment of charges, on which it proposes to rely upon in
determination of the ALP. The TPO shall give, by way of a notice, an
opportunity of personal hearing to the petitioner setting out the date
and time for the said purpose.
Haier Appliances (I) Pvt Ltd vs The Additional Commissioner of
Income Tax: WP(C) No 8054/2008;
37. In this writ petition the main grievance, amongst others is set
out in paragraph 30, 31 and 32 of the writ petition. In brief the
petitioner has said that the impugned order dated 24.10.2008 passed
by the TPO proceeds on a basis different from the show cause notice
dated 4.9.2008. It is averred that the TPO while passing the
impugned order dated 24.10.2008 had accepted the bench marking
analysis carried out by the petitioner applying TNMM method and
WP(C) 6974-2008 Page 54 of 59
did not dispute the ALP of international transactions of import of
finished products, however, the TPO made an adjustment of Rs 26.27
crores on an altogether different basis, that is, with respect to subsidy
grant against the brand promotion expenses received by the petitioner.
The petitioner is aggrieved that the adjustment of Rs 26.27 crores was
computed on a entirely different basis then that as stated in the show
cause notice. The petitioner was hence deprived of an opportunity to
meet the basis adopted by the TPO. There is no rebuttal on record
with respect to the said averment. We find that this would be a
sufficient ground to set aside the order of the TPO. The TPO in these
circumstances will, however, commence the proceedings from the
stage at which he had issued the show cause notice dated 4.9.2008.
The petitioner will within a period of 3 days from today convey to or
file any document or information which they think is necessary to
support their case before the TPO. The TPO shall also grant
inspection of the material, document or information in its possession
and also permit the petitioner to take copies of the same on payment
of charges on which it proposes to rely upon in determination of the
ALP. The TPO shall give, by way of a notice, an opportunity of
personal hearing to the petitioner setting out the date and time for the
said purpose.
Global Logic (I) Pvt ltd vs. The Additional Commissioner of
Income Tax & anr.: WP(C) No 8055/2008;
WP(C) 6974-2008 Page 55 of 59
38. In this writ petition the order dated 30.9.2008 passed by the
TPO was impugned. By the said order the TPO has made an
adjustment of Rs 2,22,55,571/- to the ALP of the international
transaction, involving rendering of a better software development
services amounting to Rs 25.62 crores. The petitioner has impugned
the order of the TPO, amongst others, on the ground that in the show
cause notice dated 26.3.2008 the TPO has proposed an adjustment of
Rs 3.281 crores and also that in the said show cause notice the TPO
had referred to 6 comparable companies. In response to the said
show cause notice the petitioner had filed a reply on 10.4.2008
wherein it had been indicated that on a correct computation of
operating profit margin of six companies identified in the show cause
notice the average operating profit margin of such companies would
work out to 9.34% as against 25.93% as shown in the show cause
notice. The petitioner followed his reply with letters dated 22.4.2008
and 28.4.2008. The petitioner‟s grievances is that despite these
replies without raising any further queries, by the impugned order
dated 30.9.2008, which was passed after a gap of 5 months, the TPO
had made an adjustment of nearly 2.22 crores after considering only
four out of the six companies as indicated in the show cause notice.
These companies were treated as comparable companies with average
operating of 21.56%. The petitioner has submitted that it was not
informed as to the basis which the TPO had applied for exclusion of
WP(C) 6974-2008 Page 56 of 59
two out of the six companies indicated initially in the show cause
notice dated 26.3.2008 issued by the TPO. There was no opportunity
to contest the calculation of the average operating margin of the four
comparable companies considered by the TPO. We find that these
facts are once again not rebutted by the respondent. The impugned
order has changed the basis as indicated in the show cause notice and
hence is quashed. The TPO in these circumstances will, however,
commence the proceedings from the stage at which he had issued the
show cause notice dated 26.3.2008. The petitioner will within a
period of 3 days from today file any document or information which
they think is necessary to support their case before the TPO. The
TPO shall also grant inspection of the material, document or
information in its possession and also permit the petitioner to take
copies of the same on payment of charges, on which it proposes to
rely upon in determination of the ALP. The TPO shall give, by way
of a notice, an opportunity of personal hearing to the petitioner setting
out the date and time for the said purpose.
Kamla Dials and Devices ltd vs The Additional Commissioner of
Income Tax and anr: WP(C) No 8579/2008;
39. Similarly, in this writ petition the order dated 17.10.2008
passed by the TPO has been impugned. The petitioner has stated that
by the impugned order TPO has made an adjustment/enhancement of
WP(C) 6974-2008 Page 57 of 59
his income to the extent of 2.51 crores. Amongst others, the
petitioner grievance is that after the issuance of the show cause notice
dated 3.10.2008 even though it furnished replies dated 10.10.2008
and 14.10.2008 wherein request was made to the TPO to provide the
material and evidence relied upon by the TPO for the proposed
adjustment as indicated in the show cause notice, the TPO did not
respond to the same and instead in haste proceeded to pass the
impugned order dated 17.10.2008. These averments are not rebutted.
We find that a fair procedure required to TPO to supply the material
based on which it proposed to make the adjustment indicated in his
show cause notice. The failure to do so in our view has vitiated the
order dated 17.10.2008 passed by the TPO. We accordingly quash
the order dated 17.10.2008. The TPO in these circumstances will,
however, commence the proceedings from the stage at which he had
issued the show cause notice dated 3.10.2008. The petitioner will
within a period of 3 days from today file any document or
information which they think is necessary to support their case before
the TPO. The TPO shall also grant inspection of the material,
document or information in its possession and also permit the
petitioner to take copies of the same on payment of charges, on which
it proposes to rely in determination of the ALP. The TPO shall give,
by way of a notice, an opportunity of personal hearing to the
petitioner setting out the date and time for the said purpose.
WP(C) 6974-2008 Page 58 of 59
39. Accordingly, the writ petitions are allowed with the directions
made hereinabove. In the circumstance there shall be no order as to
costs.
RAJIV SHAKDHER, J.
December 19, 2008 BADAR DURREZ AHMED, J.
kk
WP(C) 6974-2008 Page 59 of 59