M/S. Hindalco Industries Ltd vs Room No.2
2011 Latest Caselaw 276 Bom

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    JPP




                                                                             
          IN THE HIGH COURT OF JUDICATURE AT BOMBAY
              ORDINARY ORIGINAL CIVIL JURISDICTION




                                                    
                  WRIT PETITION (L) NO. 2782 OF 2011

    M/s. Hindalco Industries Ltd.
    Adity Birla Centre, "B" Wing, 3rd floor,




                                                   
    S.K. Ahire Marg, Worli, Mumbai - 25.              ... Petitioner.

          V/s.




                                          
    The Addl. Commissioner of Income-tax
    Transfer Pricing Officer - 1(5)
                          
    Room No.2, Ground floor, Scindia House,
    Ballard Estate, Mumbai - 400 001 & Ors.           ... Respondents.

    Mr. E.E. Dastur, Sr. Advocate with Mr. Madhur Agarwal, Mr.
                         
    Pankaj R. Toprani and Ms. Kadambari Surve for the Petitioner.
    Mr. B.M. Chatterjee with Mr. Tejveer Singh for the Respondent.

                           CORAM : DR. D.Y. CHANDRACHUD &
      

                                       A.A. SAYED, JJ.

23 DECEMBER 2011.

ORAL JUDGMENT (Per DR. D.Y. Chandrachud, J.) :-

In these proceedings under Article 226 of the

Constitution, the Petitioner has sought to challenge (i) An

order dated 31 October 2011 passed by the Additional

Commissioner of Income-tax, Transfer Pricing Officer -1(5); (ii)

A reference made on 9 October 2009 by the Assistant

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Commissioner of Income-tax to the Transfer Pricing Officer;

and (iii) The approval granted by the Commissioner of Income-

tax - VI.

2. The Petitioner filed a return of income on 30 September

2008. Together with the Return of Income, Form 3CEB

prescribed under Section 92E of the Income-tax Act, 1961

read with Rule 10E of the Income-tax Rules 1962 was enclosed

which reflected international transactions worth Rs.2267

crores of the Petitioner with its Associated Enterprises (AE's)

namely Aditya Birla Minerals Ltd., Australia, Birla Nifty Pty.

Ltd., Australia, Birla MT Gorden Pty. Ltd., Australia and AB

Minerals BV (Netherlands). In Form 3CEB which was signed

by the Chartered Accountant, there was a certification of

having examined records of the Petitioner relating to

international transactions entered into during the previous

year ending on 31 March 2008. The particulars required to be

furnished under Section 92E were furnished in the annexures

to the Form. Among the international transactions that were

disclosed, the Petitioner stated that it had an international

transaction under which, in pursuance of its business plans,

the Petitioner had acquired Novelis Inc. through its wholly

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owned subsidiary AB Minerals (Netherlands) BV. It was stated

that in discharging its responsibility to arrange funds for this

acquisition, the Petitioner had provided a corporate guarantee

to a bank which had provided the Netherlands based

subsidiary of the Petitioner with funds necessary for

acquisition.

3. On 25 September 2009, the Assessing Officer addressed

a letter to the Commissioner of Income-tax-VI, Mumbai

seeking approval for a reference under Section 92CA(1) to the

Transfer Pricing Officer for computation of the Arms Length

Price in relation to 17 Assessees of which the Petitioner was

mentioned at Serial No.12. In seeking the approval of the

Commissioner, the Assessing Officer relied upon an instruction

of the Central Board of Direct Taxes requiring that all cases

where international transactions exceed a stipulated amount

of Rs. 15 crores and covered by Section 92C be selected for

compulsory scrutiny. The approval of the Commissioner of

Income-tax - VI was communicated to the Assessing Officer

under an intimation dated 30 September 2009. The

Assessing Officer made a reference to the Transfer Pricing

Officer on 9 October 2009 stating that she considered

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it necessary and expedient to make a reference under Section

92CA(1) for the computation of the Arms Length Price. The

Transfer Pricing Officer initially issued a notice to the Petitioner

under Section 92CA on 3 March 2010. During the course of

the proceedings, the Transfer Pricing Officer issued a further

notice dated 4 October 2011 recording that from Form 3CEB

submitted on 30 September 2008, it appeared that the

Petitioner had furnished a guarantee on behalf of its

Associated Enterprise for Financial Year 2007-08 in the

amount of Rs.15,988 crores. The notice adverted to the fact

that the Transfer Pricing report furnished on 11 March 2011

stated as follows :-

" As a part of its global expansion strategy

Hindalco acquired a giant company Novelis Inc. Canada on 15 May 2007, in a transaction aggregating US $ 3.48 billion.

In order to consummate this transaction, Hindalco had to avail borrowing and financing from

international lenders. Hindalco therefore created 100% subsidiary company in the Netherlands known as AV Minerals, Netherlands ('BVCo'). BVCo in turn created another 100% subsidiary in Canada, A V Metals ('SubCo'). Both BVCo and SubCo were

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specifically created as Special Purpose Vehicles ('SPVs') by Hindalco for the purpose of this

acquisition. The acquisition of Novelis was funded by a bridge loan from a consortium of international

banks. This loan was drawn by BVCo (the 100% SPV created by Hindalco).

Hindalco, as the parent company had the prime responsibility to arrange the availability of funds to these SPVs. Hindalco, in discharge of this

obligation, provided a corporate guarantee to the international banks for due performance of the

facility agreement entered into by BVCo with these banks for availing the bridge loan for the acquisition

of Novelis.

The acquisition of Novelis was done with the

express purpose of strengthening Hindalco's global

position as an integrated aluminium producer with the presence in the entire value chain. This acquisition positioned Hindalco as a globally

integrated aluminium producer with low-cost alumina and aluminium production facilities combined with a high-end aluminium rolled product

capabilities. Therefore, looking at the objective and intent behind this acquisition, it is clear that the acquisition was intended to increase the global reach of the growth under the flagship parent company i.e. Hindalco.

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In the present case, the provision of Corporate

Guarantee by Hindalco to international banks was in substance only to serve the limited purpose of

arranging funds for overseas business expansion for Hindalco itself through the SPV. Further, in discharging its responsibility to arrange funds for

this acquisition, Hindalco has provided a corporate guarantee to the international banks who have in turn provided funds to BVCo. Thus in the opinion of

the company, and having regard to the economic

and commercial factors, it would be inappropriate for Hindalco to charge a fee from BVCo for providing

such a guarantee as there was no service provided by Hindalco to BVCo, which was merely a SPV, and like all SPVs, was created to fulfill the specific

objective of acquiring Novell for the parent company, Hindalco.

Hence, looking to the overall substance of the transaction no scope remains to charge a

Guarantee Fee for Corporate Guarantee provided to such SPV. Thus no determination of arm's length price is warranted from an Indian transfer pricing

perspective. In the alternative, charge of a NIL guarantee fee satisfies the criteria of arm's length return to Hindalco, considering the facts and circumstances of the case."

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4. Since the data on the overseas AE was not available with

the TPO, the Petitioner was called upon to submit details of

what would have been the cost of borrowing to the AE without

the guarantee. Consequently, a disclosure of details was

sought in regard to the following :-

"1. The credit rating given by the Bank to the taxpayer, while extending loan to the

AE;

The currency in which the loan is extended to the AE;

3. The credit rating given by the Bank to the AE on stand alone basis;

4. The rate of interest and the duration of

the loan extended by the Bank to your AE;

5. The rate of interest that could have been charged by the Bank, if the guarantee is not provided by the AE. If this information is not available, the credit

rating of the AEs and the equivalent rate of interest of unsecured debt in the AE country for the equivalent credit rating of your AE. If this information is

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not available, please submit the complete audited financial statements of

the AE for the last three years upto and including the financial year in which the

guarantee is provided by the taxpayer."

Details of guarantees furnished earlier by the Petitioner to its

AEs in the preceding years and outstandings as on 1 April

2007 were also sought.

5.

In the proceedings before the Transfer Pricing Officer, the

Petitioner was duly represented by its Joint President Taxation.

The Transfer Pricing Officer conducted proceedings on 10

August 2011, 30 August 2011, 7 September 2011, 14

September 2011, 26 September 2011, 5 October 2011, 14

October 2011 and 21 October 2011. During the course of the

proceedings, the Petitioner submitted replies. Among those

on the record of these proceedings are letters addressed by

the Petitioner to the Transfer Pricing Officer on 14 October

2011 and 21 October 2011. The Transfer Pricing Officer

made a determination of the Arm's Length Price by his order

dated 31 October 2011.

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6. The Petitioner in these proceedings now seeks to

question the validity of the approval granted by the

Commissioner of Income-tax to the Assessing Officer, the

reference made by the Assessing Officer to the Transfer

Pricing Officer on 9 October 2009 and of the order dated 31

October 2011 passed by the Transfer Pricing Officer.

7. Counsel appearing on behalf of the Petitioner submitted

that (i) Section 92CA empowers the Assessing Officer to make

a reference to the Transfer Pricing Officer where the Assessee

has entered into an international transaction in any previous

year and the Assessing Officer considers it necessary to do so

with the previous approval of the Commissioner for

computation of the Arm's Length Price in relation to the

international transaction. The submission is that before a

reference can be made, the Assessing Officer must consider it

necessary or expedient to do so and the Commissioner has to

grant his approval. It has been urged that the reference was

made on the basis of an instruction of the Board stipulating

that all cases involving any international transactions in

excess of Rs.15 crores would entail a reference and that the

Assessing Officer had not fulfilled the jurisdictional condition

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necessitated for making a reference. Moreover, it was urged

that the Commissioner had not acted in accordance with the

statute when he granted his approval in the case of as many

as 17 Assessees; (ii) Upon a reference being made by the

Assessing Officer to the Transfer Pricing Officer, Section

92CA(3) requires the Transfer Pricing Officer to determine the

Arm's Length Price in relation to the international transaction

in accordance with sub-Section (3) of Section 92C. The

proviso to Section 92C(3) requires the Assessing Officer to

furnish an opportunity by serving a notice calling upon the

Assessee to show cause why the Arm's Length Price should

not be determined on the basis of material, information or

documents in the possession of the Assessing Officer. It has

been urged that there was a breach of the principles of

natural justice by the Transfer Pricing Officer since according

to the Petitioner, the requirements of the Proviso to Section

92C(3) were not fulfilled; (iii) A reference under Section

92CA(1) can be made only where an Assessee has entered

into an international transaction. In the present case, the

guarantee was issued by the bank at the behest of the

Petitioner and as between the bank and the Petitioner there is

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no international transaction. Moreover, the expression

"international transaction" is defined in Section 92B and the

issuance of a guarantee does not involve either the sale of

goods or the provision of a service. On this ground, it has

been urged on behalf of the Petitioner that the interference of

this Court in the exercise of its jurisdiction under Article 226 of

the Constitution is warranted.

8. On the other hand, it has been urged on behalf of the

Revenue that (i) Form 3CEB under Section 92E which was

enclosed with the return of income reflected international

transactions and the fact that the Petitioner has entered into

an international transaction is evident from the Form which

has been certified by the Chartered Accountant on 29

September 2008; (ii) The exercise of the Writ Jurisdiction

under Article 226 of the Constitution is not warranted at the

present stage. The Transfer Pricing Officer having made a

determination under Section 92CA(3), the Assessing Officer is

required to compute the income of the Assessee under

Section 92C(4) in conformity with the Arm's Length Price

determined by the Transfer Pricing Officer. Before the

Assessing Officer does so, he is duty bound under Section 144

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C(1) to forward a draft of the proposed order of assessment to

the Assessee, if he proposes to make any variation in the

income on last return that is prejudicial to the Assessee.

Thereupon, the Assessee has a remedy before the Dispute

Resolution Panel. Even thereafter, the Assessee has available

to it the remedy of an appeal under Section 253(1)(d) upon an

order passed by the Assessing Officer under Section 143(3) or

Section 147 in pursuance of the directions of the Dispute

Resolution Panel; (iii) The reference in the present case was

made by the Assessing Officer to the Transfer Pricing Officer

on 9 October 2009, pursuant to the approval granted on 13

September 2009. The Assessee participated before the

Transfer Pricing Officer and was duly represented. The

Petition under Article 226 of the Constitution has been filed on

15 December 2011. Having received the initial notice from

the Transfer Pricing Officer on 3 March 2010 and having

participated in the proceedings before the Transfer Pricing

Officer, the proceedings under Article 226 should not be

entertained at this stage particularly since adequate remedies

are available to the Assessee; (iv) The Assessee was furnished

a notice by the Transfer Pricing Officer consistent with the

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provisions of Section 92CA(3) and the proviso to Section

92C(3). This is evident inter-alia from the communication

addressed by the Transfer Pricing Officer to the Assessee on 4

October 2011 (Exhibit A). The responses of the Assessee

dated 14 October 2011 and 21 October 2011 would show that

the Assessee was on notice of the nature of the proceedings

before the Assessing Officer and the ambit of the enquiry.

Having made submissions before the Assessing Officer, the

Assessee should not be allowed to urge to the contrary.

9. The rival submissions now fall for determination.

10. Section 92(1) provides that any income arising from an

international transaction shall be computed having regard to

the Arm's Length Price. Section 92B(1) defines the expression

"international transaction" while Section 92C provides for the

computation of the Arm's Length Price. Under sub-Section (3)

of Section 92C, the Assessing Officer is empowered to

determine the Arm's Length Price in relation to an

international transaction on the basis of the provisions of sub-

Sections (1) and (2) taking account of such material,

information or documents as is available with him, where he is

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of the opinion inter-alia that the price charged or paid in an

international transaction has not been determined in

accordance with sub-Sections (1) and (2), or where the

information and documents relating to the transaction have

not been kept by the Assessee in accordance with the

statutory provisions; or where the information or data used in

the computation is not reliable or correct or the Assesee has

failed to furnish within a specified time any document which

he is required to furnish. Section 92CA empowers the

Assessing Officer to make a reference to the Transfer Pricing

Officer. Under sub-Section 1 of Section 92CA, where any

person being an Assessee has entered into an international

transaction in any previous year and the Assessing Officer

considers it necessary or expedient so to do, he may, with the

Commissioner's approval refer the computation of the Arm's

Length Price in relation to the international transaction under

Section 92C to the Transfer Pricing Officer. Upon a reference

being made to him, the Transfer Pricing Officer is required to

serve upon the Assessee a notice requiring the Assessee to

produce any evidence on which the Assessee may rely upon in

support of the computation made by him of the Arm's Length

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Price in relation to the international transaction. After

considering the evidence which the Assessee may produce

and after taking into account all relevant materials which he

has gathered, the Transfer Pricing Officer can determine the

Arm's Length Price in accordance with sub-Section (3) of

Section 92C. The proviso to sub-Section (3) requires the

Assessing Officer to furnish a notice calling upon the Assessee

to show cause why the Arm's Length Price should not be

determined on the basis of material, information

documents in the possession of the Assessing Officer. Once a or

determination is made by the Transfer Pricing Officer, the

Assessing Officer under Section 92CA(4) has to compute the

total income of the Assessee in conformity with the Arm's

Length Price as determined by the Transfer Pricing Officer.

Section 144C mandates that the Assessing Officer shall

forward a draft of the proposed order of assessment if he

proposes to make any variation in the income or loss returned

which is prejudicial to the interest of the Assessee. Upon

receipt of the draft order, the Assessee is entitled to submit

his objections to the variation with the Dispute Resolution

Panel and the Assessing Officer under sub-Section (5) of

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Section 144C. The Dispute Resolution Panel where it has

received any objections from the Assessee is empowered to

issue such directions, as it thinks fit, for the guidance of the

Assessing Officer. The Dispute Resolution Panel is empowered

under sub-Section (7) to make its own enquiry or to cause any

further enquiry to be made by any Income-tax Authority.

Under sub-Section (8) the Panel may confirm, reduce or

enhance the variations of the draft order so, however, that it

shall not set aside any variation or issue any direction under

sub-Section (5) for further enquiry and passing of the

assessment order. Under Section 253(1)(d), an order passed

by the Assessing Officer under Section 143(3) or Section 147

in pursuance of the directions of the Dispute Resolution Panel

is subject to an appeal before the Appellate Tribunal.

11. In the present case, the Assessing Officer, while making

a reference to the Transfer Pricing Officer stated in her order

dated 9 October 2009 that she considered it necessary or

expedient so to do. While seeking the approval of the

Commissioner, the Assessing Officer relied upon an

instruction of the CBDT which stipulates that all cases where

international transactions exceeding Rs. 15 crores are

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involved, shall within the meaning of Section 92 be selected

for compulsory scrutiny. The Commissioner granted his

approval on 30 September 2009. The Transfer Pricing Officer

issued a notice to the Assessee as far back as on 3 March

2010 upon receipt of the reference. The Petitioner

participated in the proceedings before the Transfer Pricing

Officer. Eight hearings took place before the Transfer Pricing

Officer in the course of which the Petitioner submitted its

representations.

The Transfer Pricing Officer has now

rendered a determination on 31 October 2011. At this stage,

we are of the considered view that it would be inappropriate

for this Court to exercise its writ jurisdiction under Article 226

of the Constitution to entertain a Petition challenging the

validity of the reference made by the Assessing Officer to the

Transfer Pricing Officer on 9 October 2009 and the underlying

approval of the Commissioner dated 30 September 2009,

both of which have been issued over two years ago. The

Petitioner, in any case had notice before the Transfer Pricing

Officer as far back as on 3 March 2010 and participated in

those proceedings. Under the statutory provisions, to which a

reference is made earlier, a comprehensive remedy is

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available to the Petitioner before the Assessing Officer frames

an order of Assessment. A draft order has to be prepared to

which the Petitioner is entitled to submit its objections. Even

against the draft order, the Petitioner has a remedy of moving

the Dispute Resolution Panel. Though the Assessing Officer is

bound by the determination of the Arm's Length Price by the

Transfer Pricing Officer, it is evident from the statutory

scheme that the Appellate Tribunal before which remedy of an

Appeal is available would be entitled to consider every aspect

of the matter when it renders its decision in the exercise of its

appellate powers.

12. In this view of the matter, we are not inclined to

exercise the writ jurisdiction under Article 226 of the

Constitution at this stage. We find no merit in the submission

that there was a breach of the principles of natural justice by

the Transfer Pricing Officer. Under sub-Section (3) of Section

92CA the Transfer Pricing Officer is required to comply with

the principles of natural justice and to render a determination

of the Arm's Length Price in relation to the international

transaction in accordance with Section 92C(3), the proviso to

which has been noted earlier. The Delhi High Court in its

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decision in Maruti Suzuki India Ltd. v/s. Additional

Commissioner of Income-tax1 has affirmed the importance

of complying with the principles of natural justice for the

purposes of the proceeding. In this case, the Petitioner was

on notice of the nature of the enquiry which was being

pursued by the Transfer Pricing Officer. The Transfer Pricing

Officer addressed a communication on 4 October 2011

detailing the information that was required and the basis on

which disclosure was sought. The Petitioner adduced detailed

submissions by its letter dated 14 and 21 October 2011.

13. We are of the view that there is no breach of the

principles of natural justice which would warrant the

interference of this Court under Article 226 of the Constitution,

at this stage. We however clarify that in the remedy which is

available to the Petitioner in appeal, it would be open to the

Petitioner to urge all appropriate grounds and contentions and

these observations are made by the Court confined to the

question as to whether a Petition under Article 226 of the

Constitution should be entertained at this stage. Before we

conclude, we may also note that in the present case, there is

1 (2010) 328 ITR 210

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no challenge to the validity of the instructions issued by the

CBDT (Instruction 3/2003). The validity thereof has been

upheld by the Delhi High Court in Sony India (P) Ltd. v/s.

Central Board of Direct Taxes2.

14. For the aforesaid reasons, no case for interference

under Article 226 of the Constitution is made out. The Petition

is accordingly dismissed.

ig (Dr. D.Y. Chandrachud, J.)

(A.A. Sayed, J.)

2 (2007) 288 ITR 52