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M/s. Hyundai Motor I... v. The Deputy Commissi...

Madras High Court
Jul 16, 2018
Judgment
Subsequent
References
CaseIQ
Case Information
CITATION CODES
citation codes
CASE NO.

W.P. No. 22508 of 2017 & W.M.P. No. 38346 of 2017

Attorney(S)

For the Appellant: N. Venkata Raman, Senior Counsel, M/s. S.P. Chidambaram, Advocate.

For the Respondent: Hema MuraliKrishnan, Advocate.

JUDGES

Hon'ble Mr.Justice S.M.Subramaniam

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Smart Summary (Beta)

Factual and Procedural Background

The writ petitioner filed a Writ Petition under Article 226 seeking a writ of Certiorarified Mandamus to quash the "giving effect" order F.No.H-201/TPO-2/A.Y.2008-09 dated 27.03.2017 issued by the 1st respondent (the Transfer Pricing Officer, TPO), and to direct the 1st respondent to give specific effect to an order of the Income Tax Appellate Tribunal (ITAT) in M.P.No.93/Mds/2016 in ITA No.2353/Mds/2012 dated 06.09.2016.

Procedurally, the petitioner had international transactions with associated enterprises and the matter was referred to the TPO who passed an order on 28.10.2011 under Section 92CA of the Income Tax Act, 1961. The Assessing Officer issued a draft order under Section 144C(1) and the petitioner filed objections with the Dispute Resolution Panel (DRP). The DRP issued directions under Section 144C(5) and the Assessing Officer passed a final assessment order on 29.10.2012 under Section 144C(15). That assessment was challenged before the ITAT under Section 253. The ITAT, in ITA No.93/Mds/2012 (order dated 22.04.2016) and in M.P.93/Mds/2016 (order dated 06.09.2016), remanded the matter to the TPO for re-adjudication. Pursuant to that remand and after hearings, the TPO passed the impugned order on 27.03.2017, which is the subject matter of this writ petition.

Legal Issues Presented

  1. Whether the giving-effect order dated 27.03.2017 issued by the Transfer Pricing Officer can be quashed on the ground that it is perverse and contrary to the ITAT's order dated 06.09.2016 (M.P.No.93/Mds/2016 in ITA No.2353/Mds/2012)?
  2. Whether the petitioner can seek relief under Article 226 in respect of factual disputes concerning the determination of the arm's length price (ALP) — specifically the proper determination of the average rate of royalty in the industry — bypassing statutory remedies such as the DRP and the ITAT?
  3. Whether a show cause notice was required before revising the royalty payment in the re-adjudication pursuant to the ITAT remand?

Arguments of the Parties

Writ Petitioner's Arguments

  • The impugned TPO order dated 27.03.2017 is perverse and contrary to the ITAT's order dated 06.09.2016; the TPO erroneously concluded that the ITAT had committed an error in fixing transfer prices.
  • The TPO's order is an error apparent on the face of the record because the ITAT had recorded findings after adjudication which the respondents purported to declare erroneous without jurisdiction.
  • No show cause notice was issued in respect of the differences now raised by the first respondent when revising the royalty payment; therefore the petition should succeed on this procedural ground.
  • The ITAT (or a Bench of the Tribunal) had earlier found that the average industry royalty rate was 4.7%, which is higher than the petitioner's average royalty rate of 3.6%; on that basis, no adjustment in the petitioner's favour was warranted and the respondents had no authority to override the ITAT finding.
  • The TPO's re-implementation of the ITAT order is erroneous as it disregards that recorded average industry rate and thereby produced an illegitimate revision of royalty liability.

Respondents' Arguments

  • The writ petition is not maintainable because the petitioner has not exhausted statutory remedies: any grievance against the TPO's action is to be addressed to the Dispute Resolution Panel (DRP) and thereafter to the ITAT.
  • The present challenge to the TPO's order is premature since the Assessing Officer must pass a final order after taking the TPO's determination into account; a TPO order alone does not constitute a cause of action for a writ under Article 226.
  • The TPO's re-adjudication was based on scrutiny of the petitioner's own records and books of account; the TPO found discrepancies in royalty payments after hearings and consideration of objections.
  • Contrary to the petitioner's assertion, the ITAT's order dated 06.09.2016 remanded the matter for re-adjudication because the ITAT itself recorded that discrepancies existed and directed the TPO to verify and decide the matter in light of the Tribunal's earlier decision for the preceding year.
  • Because the matter was remanded, issuance of a fresh show cause notice was not required; the petitioner was given opportunities (three personal hearings) and principles of natural justice were complied with.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
ITAT — M.P.No.93/Mds/2016 in ITA No.2353/Mds/2012 dated 06.09.2016 (paragraphs 6 and 7 quoted in the record) The ITAT noted that: (a) the average rate of royalty in the industry for the relevant year was 4.7%, higher than the assessee's 3.6%; (b) following the Tribunal's decision for the preceding year, the average industry rate must be considered for determining arm's length price and, if higher than the assessee's rate, no adjustment is required; the ITAT directed the TPO to verify the rate and decide in light of that decision. The Court recorded and reproduced paragraphs 6 and 7 of the ITAT order to show that the ITAT remanded the matter for re-adjudication and directed the TPO to verify the average industry rate. The Court relied on the fact of the remand to explain that the TPO was required to re-examine records and that the ITAT's interim observations did not preclude full reconsideration by the TPO.
ITAT — ITA No.93/Mds/2012 (order dated 22.04.2016) and related references to the Tribunal's decision for the preceding year (as cited in the record) Reference to prior Tribunal adjudications and that the Tribunal had remanded the matter back to the TPO for re-adjudication (indicating that factual verification was to be undertaken afresh by the TPO). The Court noted that the ITAT had remanded the case back to the TPO and that remand required the TPO to re-adjudicate and verify records. The Court treated the remand as the operative procedural step that permitted the TPO to reassess factual aspects (including royalty computations) and declined to treat the ITAT's recorded observations as final in the re-adjudication context.

Court's Reasoning and Analysis

The Court's analysis proceeds along two interrelated lines: jurisdictional/appropriate forum considerations and the legal effect of an appellate remand.

  1. Forum and maintainability: The Court held that disputes involving factual determinations about the arm's length price (ALP) are to be adjudicated by the competent statutory authorities and appellate forums (i.e., the DRP and the ITAT). The petitioner cannot bypass these statutory remedies by invoking Article 226 to re-litigate factual ALP determinations. The Court therefore treated the writ petition as an improper forum to decide these factual disputes.
  2. Effect of the ITAT remand: The Court emphasized that the ITAT had remanded the matter for re-adjudication, expressly directing the TPO to verify the industry average royalty rate and decide the matter in light of the Tribunal's earlier decision. When a matter is remanded, the original authority (here, the TPO) is obliged to re-examine all records and relevant factors and to pass a revised order on merits. Consequently, the Court explained that the ITAT's recorded observations made during hearing do not become final and binding in the remanded proceedings; rather, the remand contemplates independent re-adjudication by the TPO.
  3. Procedural fairness and show cause notices: The Court accepted the respondents' position that a separate show cause notice was not mandatory in the remand context. It relied on factual findings that the petitioner was aware of the records, was invited to hearings, participated in three personal hearings, and presented objections which were considered. On that basis, the Court concluded that principles of natural justice had been complied with in the re-adjudication process.
  4. Evaluation of the TPO's exercise of power: Having noted the remand and the TPO's reconsideration of records (including hearings and scrutiny of documents), the Court found no error on the part of the TPO in re-examining the books of account and determining royalty-related discrepancies. The Court reasoned that if the ITAT's interim finding were to be treated as conclusive in a remanded case, the purpose of remanding would be defeated; remand requires the original authority to reconsider independently.

The Court therefore framed its reasoning around statute-based appeal routes, the proper scope of remand by an appellate tribunal, and the procedural history demonstrating participation of the petitioner in the re-adjudication.

Holding and Implications

Core Ruling: The Court held that the writ petition is not the appropriate forum to adjudicate factual disputes concerning the determination of the arm's length price and that, in the circumstances of this case, there was no error on the part of the Transfer Pricing Officer in re-adjudicating the matter pursuant to the ITAT remand.

Implications:

  • The direct consequence for the parties is that the TPO's process of re-adjudication (including the impugned order dated 27.03.2017) is not found to be erroneous by the Court on the grounds advanced in the writ petition as set out in the opinion.
  • The petitioner is obliged to pursue available statutory remedies (DRP and ITAT) rather than seeking to have factual ALP determinations re-opened in a writ petition under Article 226.
  • The opinion explains that the ITAT's observations made in the course of hearing do not preclude the TPO from independently verifying records upon remand; therefore, the remand process contemplates fresh fact-finding and does not freeze the ITAT's interim statements as final determinations in the re-adjudication.
  • No broader new legal precedent beyond these conclusions is claimed or articulated in the opinion; the Court's statements operate as the Court's determination of the issues in this particular case and emphasize adherence to statutory appellate routes and remand procedure.

This summary is strictly limited to and derived from the information contained in the provided opinion excerpt.

Show all summary ...

Prayer: Writ Petition filed under Article 226 of the Constitution of India praying to issue a Writ of Certiorarified Mandamus, to quash the giving effect order F.No.H-201/TPO-2/A.Y.2008-09 dated 27.03.2017 issued by the 1st respondent and to issue directions to the 1st respondent to give proper and specific effect to the order of the ITAT in Miscellaneous Petition No.93/Mds/2016 in ITA No.2353/Mds/2012 dated 06.09.2016.)

The relief sought for in this writ petition is to call for the records in pursuant to the orders passed by the 1st respondent in proceedings dated 27.03.2017 and quash the same and to direct the first respondent to give proper and specific effect to the order of the ITAT in Miscellaneous Petition No.93/Mds/2016 in ITA No.2353/Mds/2012 dated 06.09.2016.

2. The learned Senior Counsel appearing on behalf of the writ petitioner made a submission that the order under challenge in the present writ petition is perverse and contrary to the orders passed by the Income Tax Appellate Tribunal(hereinafter referred to as “the ITAT”) in M.P.No.93/Mds/2016 in ITA No.2353/Mds/2012 dated 06.09.2016. The first respondent has erroneously come to the conclusion that “the ITAT” has committed an error in respect of fixing the Transfer Prices. The learned Senior Counsel is of an opinion that the order impugned is an error apparent on record in view of the fact that the findings arrived by “the ITAT” ,after adjudication, in its order has been declared as erroneous by the respondents for which the respondent has no jurisdiction or authority. It is contended that no show cause notice was issued in respect of the differences now raised by the first respondent in the notice for revising the royalty payment.

3. The contentions of the writ petitioner is that the issue drawing strength from the earlier decision of the Bench of the Tribunal for the preceding assessment year, wherein there was a categorical finding by the Transfer Pricing Officer(TPO) that the average rate of royalty payment in the industry was 4.7%. Further, the contention of the writ petitioner is that the average royalty payment in automotive sector from the study of 35 licenses is 4.7%, which is higher than the appellant's average rate of royalty payment of 3.60%.

4. By showing the screen shot details, the learned Senior Counsel appearing on behalf of the writ petitioner made a submission that the impugned order is an error apparent on record and the respondents have no authority to override the findings given by “the ITAT” in the matter of the payment of royalty to the foreign entity. Further, it is contended that a show cause notice in this regard in respect of the revised assessment made in relation to royalty payment, must be given to the writ petitioner. Admittedly, no such show cause notice was issued to the writ petitioner and on that ground also, the writ petition deserves to be allowed.

5. The writ petitioner had transactions with associated enterprises and therefore, the case was referred to the Transfer Pricing Officer(TPO)/ the first respondent passed an order dated 28.10.2011 under Section 92CA of the Income Tax Act, 1961. The Transfer Pricing Officer(TPO) has the power only to determine the Arms Length Price in case of international transaction or specified domestic transaction. The order of the Transfer Pricing Officer(TPO) is not an assessment order but an intermediate order with regard to Arms Length Price alone. The assessing officer, while computing the total income and taxable income at the time of passing the assessment order, takes into account the order of the Transfer Pricing Officer(TPO) for the purpose of computation of income relatable to international transaction or specified domestic transaction. Thus, on receipt of the order of the Transfer Pricing Officer(TPO), the assessing officer/the second respondent passed a draft order under Section 144C(1) on 23.12.2011. The petitioner also filed their objections before the Disputes Resolution Panel (DRP) under Section 144C(2) and the Disputes Resolution Panel passed orders and issued directions under Section 144C(5). Thereafter, the second respondent passed an assessment order on 29.10.2012 under Section 144C(15) in accordance with the directions of the Disputes Resolution Panel. The said order dated 29.10.2012 was challenged by the petitioner herein before “the ITAT” under Section 253 of the Income tax Act, 1961. In the meanwhile rectified directions were issued by the Disputes Resolution Panel on 30.03.2013. “The ITAT” passed order in ITA No.93/Mds/2012 on 22.04.2016 and in M.P.93/Mds/2016 dated 06.09.2016 remanding the case to the Transfer Pricing Officer(TPO).

6. Pursuant to the order of “the ITAT”, the Transfer Pricing Officer(TPO) had granted several hearings to the writ petitioner and finally passed an order on 27.03.2017, which is under challenge in the present writ petition. Thus, the writ petitioner has made an attempt to maintain the present writ petition on merits of the issues i.e., how the arm's length price has to be determined.

7. This Court is of an opinion that the said issue cannot be adjudicated in a writ petition and these factual disputes are to be adjudicated by the competent authorities and by “the ITAT”. Bye-passing all these Appellate Forums, the writ petitioner cannot approach this Hon'ble Court under Article 226 of the Constitution of India for adjudicating these factual issues in respect of considering the arm's length price to be determined.

8. The learned counsel appearing on behalf of the respondents opposed the contentions raised on behalf of the writ petitioner by stating that the writ petition itself is not maintainable. The present writ petition has been filed, challenging the order passed by the Deputy Commissioner of Income Tax Transfer Pricing Officer(TPO). Based on the records provided by the writ petitioner, the Transfer Pricing Officer(TPO) conducted a scrutiny and arrived a conclusion that there was an error in respect of royalty payment and therefore, the same is to be revised. The said exercise was done based on the records and books of accounts furnished by the writ petitioner themselves. Therefore, if at all, any discrepancy or an error, the writ petitioner is at liberty to file an appeal before the Disputes Resolution Panel, which is a statutory body. The writ petition filed against the order of the Transfer Pricing Officer(TPO) is premature in view of the fact that the Assessing Officer has to pass a final order based on the proceedings of the Transfer Pricing Officer(TPO). Therefore, the order of the Transfer Pricing Officer(TPO) cannot constitute a cause of action for the purpose of moving the present writ petition under Article 226 of the Constitution of India. The learned counsel for the respondents is of an opinion that the writ petitioner has to exhaust the remedy before the Disputes Resolution Panel constituted under the statute and further, they are bound to approach “the ITAT” for redressal of their grievances. By-passing all these statutory remedies, the present writ petition has been filed, challenging the proceedings of the Transfer Pricing Officer(TPO), which is not maintainable.

9. The learned counsel for the respondents relied on the counter statement, showing that the Transfer Pricing Officer(TPO) has not violated the orders of “the ITAT”. In fact, the case of the petitioner was originally adjudicated before “the ITAT” and “the ITAT” remanded the case back for re-adjudication. The order of “the ITAT” dated 6th September 2016 is unambiguous that there were certain discrepancies and on that ground alone, “the ITAT” has remanded the matter back for re-adjudication. Paragraphs 6 and 7 of the above said order of “the ITAT” dated 6th September 2016, which are extracted hereunder:

“6. It is submitted by the learned Authorized Representative that for the relevant assessment year also the average rate of royalty in the industry is 4.7% which is higher than the appellant's average rate of royalty payment of 3.6%. Therefore, there is apparent mistake in the order of the Tribunal which is required to be rectified.

7. On this issue, following our decision for the preceding year, we have already decided that the average rate of royalty payment in the industry has to be considered in the case of the assessee for determining the arm's length price and if the same is more than the rate of royalty payment made by the assessee, then no adjustment is required. Since the Ld.A.R has pointed out that in the case of the assessee the rate of Royalty payment is less than the rate prevalent in the industry we hereby direct the learned TPO to verify the same and decide the matter in the light of our above decision. To that extent, the order of the Tribunal stands corrected and modified.”

10. It is urged before this Court that “the ITAT” has not decided the matter in respect of the factual details and the particulars involved in the case of the writ petitioner. Contrarily, “the ITAT” remanded the matter back for re-adjudication. When the process of re-adjudication is undertaken by the competent authority/respondents, they are duty bound to verify all the records once again and decide the matter on merits and in accordance with law. On receipt of the order of remand from “the ITAT”, the respondents had undertaken the process of scrutiny and the writ petitioner also had participated in three personal hearings. The documents submitted by the writ petitioner was scrutinised and considered in all respects. The objections from the representative of the writ petitioner Company also had been considered. By providing all opportunities to re-present their case, the Transfer Pricing Officer(TPO) found that there were certain discrepancies in the matter of royalty payment. Thus, there was no violation on the part of the respondents in respect of implementing the orders passed by “the ITAT”, remanding the matter for re-consideration.

11. Question of issuing show cause notice, does not arise in the case of the writ petitioner in view of the fact that it is a case, which was remanded by “the ITAT”. The writ petitioner was aware of all the facts and circumstances and the records. Thus, the writ petitioner was invited for personal hearing and the writ petitioner had participated in three personal hearings and submitted their case before the respondents. Such being the factum of the case, now, the learned Senior Counsel appearing on behalf of the writ petitioner cannot plead that no show cause notice has been issued. It is not a fresh case, wherein a show cause notice is mandatory. It is a remanded case. Further, even while re-considering the issues, the notice was issued to the writ petitioner and they participated in three personal hearings. Therefore, the principles of natural justice had been complied with and the contentions in this regard by the learned Senior Counsel appearing on behalf of the writ petitioner deserves no merit consideration.

12. The contentions of the learned Senior Counsel appearing on behalf of the writ petitioner is that the erroneous implementation of the order of “the ITAT”, resulted in issuance of the present impugned order dated 27.03.2017 by the Transfer Pricing Officer(TPO). Once, it is recorded by “the ITAT” that the average rate of royalty payment in the industry was 4.7% and the writ petitioner had paid only 3.6%, there is no reason to disbelieve the statement of “the ITAT” recorded during the hearing of the matter. In the absence of any incriminating, contrary evidences or records, the respondents cannot disbelieve or disrespect the findings made by “the ITAT” in its order.

13. This Court is of an opinion that certain factual details based on the records can be re-adjudicated or verified once again when the matter was remanded back for re-consideration. Though there is a finding recorded by “the ITAT” during the course of presenting the case, ultimately the case was remanded to the original authority for re-consideration by “the ITAT”. When the case was remanded back for re-adjudication, the findings made by “the ITAT” cannot be taken or relied upon as it is. The very purpose of remanding the matter to the original authority by the Courts/Tribunals are to ensure that all the records and relevant factors are to be re-considered, re-adjudicated and a revised order is to be passed. When the order of “the ITAT” is unambiguous and when the case of the writ petitioner was remanded back for reconsideration in the hands of the original authorities, then the original authorities are bound to conduct an enquiry by verifying the original records once again and re-adjudicate the matter, re-consider the factual aspects and accordingly, pass a final order. The said exercise was done in the present case. Thus, this Court do not find any error on the part of the Transfer Pricing Officer(TPO) in reconsidering the entire books of accounts submitted by the writ petitioner for the purpose of assessing the average rate of royalty payment in the industry. The findings made by “the ITAT” in the order need not be directly taken into account for the purpose of considering the average rate of royalty payment in the industry in view of the fact that, if that is taken into account, then there is no point in remanding the matter for reconsideration. The very purpose and object of the Courts/Tribunals to remand the matter is that the authorities must reconsider the case in all respects independently and pass a revised order on merits and in accordance with law. This being the scope of the order of remanding the contentions raised on behalf of the writ petitioner that the average rate of royalty payment in the industry was already fixed by “the ITAT” can have no sanctity. These all are the points raised by the respective parties before “the ITAT” and the same was recorded in the order passed by “the ITAT”. When “the ITAT” itself was not decided the issues raised before the Tribunal and remanded the case back for reconsideration, then there is no point in recording the findings of “the ITAT” by the Transfer Pricing Officer(TPO) at the time of exercising the powers of reconsideration of the entire issues. The very contention raised in this regard also deserves no merit consideration.

14. The learned counsel for the respondents urged this Court that the royalty has been computed by three different methods as under:-

“It may be seen from the chart that royalty has been computed by three different methods as under:-

(a) 5% of sales value for models like Santro, Accent, Sonata, Getz, Elantra and Verna in domestic market

(b)100$ per i-10 car sold in domestic and export market

(c) 8% of sales value for models like Santro, Accent and Getz in export market.

Sales Valuehas been computed as under:-

Gross sales = xxxx

Less:

Excise Duty = xxx

Landed cost of imported components = xxx

Cost of standard bought-out components=xxx = xxxx

Sale Value for computation of royalty = xxxx

Royalty has been computed @ 5% or 8% of the above sale value and paid.

But for Transfer Pricing purposes, the Petitioner has computed a higher sales value by reducing only the Excise duty from the gross sales and not reducing the other two items, viz, landed cost of imported components and cost of standard bought-out components. This has been done only to bring down the royalty ratio as seen from the chart, which is re-presented in a comparative form in the table below to enable totaling of crucial columns which has been avoided by the Petitioner:

(Figures in Rs.in crores)

MarketModelNet Sales as per RBI guidelinesSales for royalty ratio purposesRoyalty RateRoyalty Ratio*Royalty amount
(1)

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